Introduction Page 30 of the Current BI Magazine lists 5 small stocks with potential to fill in the weak spots in our portfolio. Looking at the diversification table I published last month you can see the places we need to fill in and improve. We have too many large companies [that don't grow at the rates of small and medium sized ones]. We need to focus on adding to the areas where we aren't and not add more big mature companies.

As the article states The classic balance recommended by BetterInvesting is 25% small, 50% Medium, and 25% Large companies based on annual revenues. As Better Investors, we prefer companies with 30% or less in Debt. For Large-Cap stocks (revenues >$5B), expected growth rate should be 7-10%. For Mid-Cap stocks (revenues $500M – $5B), expected growth rate should be 10-15%.

The stocks we considered are Advanced BatteryABAT HMS HoldingsHMSY MedifastMED Portfolio RecoveryPRAA SynapticsSYNA Plus several others.

Recommendation We believe Medifast [MED] fills a sector in our portfolio where we are not represented. Medifast [MED] is an excellent small stock with great growth potential. Here is why.

Medifast Background Medifast is an organization that produces, distributes and sells diet products The organization had revenues of $105 million in 2008 and $165 million in 2009 and projected revenues of $259 million in 2010.

Background Cont’d Medifast has three primary channels of distribution: 1.Take Shape for Life – Direct Selling Model of Distribution using “Health Coaches”. Makes up 61% of revenue. This channel had revenue growth of 101% from 2008 to Direct Response – Orders placed directly through the website. Makes up 29% of revenue. This channel had revenue growth of 7% from 2008 to Medifast Weight Control Center – Brick and Mortar centers; 39 in Makes up 10% of revenues. Expected to add 13 addtl in This channel had revenue growth of 93% from 2008 to 2009.

Competition Medifast’s main competitors are Herbalife, Weight Watcher’s and NutriSystem. 1.NutriSystem is a solid small company; revenues and earnings have shown declines from ; now rebounding. 2.Herbalife has higher debt; also not in the buy zone. 3.Weight Watchers has been relatively flat over the past three years…not in the buy zone.

Fundamental Analysis We will now discuss the: Medifast SSG Analysis of Annual Report using Bob Adams’s Annual Report Analysis Tool Impact on Portfolio Diversification Table