What will be evident is the superiority of Rule #1 investing and how wonderful businesses react to volatility (we’ve had plenty of that), favorable market conditions (had plenty of that), and not so favorable market conditions (we’ve had some of that too). Not only do wonderful businesses perform well, but they continue to remain valuable holds even when catching fire by increasing their intrinsic values. Remember what Mr. Town said, the best time to sell a wonderful business is “never.”

For those of you who are already subscribers of Wonderful Businesses, we know you will enjoy our breakdown of the past year. For those not yet on board, we invite you to join us and see why Rule #1 investing is the best system for stock investment in the world.

We have also added two companies to our list of Rule #1′s, bringing our coverage total to 38. These are the US traded stocks with the “Big Five” numbers over the last one, three, and five-year periods.

Read about the wonderful business who just completed a major acquisition and is receiving analyst upgrades due to this new revenue stream. And they are on sale right now big!

We have a new addition to our top five power rankings. See which business has made the list and why.

See which wonderful business heavyweight has a big earnings announcement due up this week and what the Street expects

And as always:

Wonderful Businesses, the weekly online newsletter for the Rule #1 investor, provides all news, information, sticker prices, and margins of safety for every “Rule #1″ businesses. For a limited time only, pay just a one-time charge of $29.95 and receive your edition each week before market open on Monday morning.

1. Don’t underestimate Japan

And I mean this two ways. First, don’t underestimate the impact the Japan tragedy had on the global system. Japan supplies so many corporations worldwide with products big and small that no ever even things of. They have the world’s third largest economy. The US is extremely dependent on Japan and a definitive slowdown in production took place as Japan coped with its wreckage. But…the Japanese have been making amazing strides towards recovery, and the planet has really come in to help. The Japan tragedy will have only a fraction of the negative impact market wise that it did in the second quarter.

2. Gas and Food

Americans just didn’t have the same amount of discretionary income to pool back into the economy because they were getting beaten down at the supermarket and the pump. Give Bernanke credit on this one; he said the $4.25 gallon of gas and sky high commodity prices were a passing shower, and he looks to be correct. Evidence of a rebound in this area came in today as major retailers reported strong June sales.

3. Europe

No, Europe is not in good shape financially, but it is not going to collapse and its most ailing countries, such as Greece, have plans in place for recovery. Whenever the EU is in the news for negative fiscal reasons investors flee; this was a depressive force during the first half of last year and this year. But Greece passed its austerity plan and things should quiet down for awhile anyway. That’s all the market cares about.

4. Corporate Earnings

Corporations traded in the US are by and large in good financial health and are reporting strong earnings. Rule #1 companies are by and large in tremendous financial health. Many Rule #1′s are poised for a breakout.

5. An unusual amount of international unrest

Although originally shaken off by the market, the amount of international unrest got just too heavy. Egypt resolved rather quickly, some potentially market shaking civil revolts in oil producing nations were thwarted off, but Libya was just one problem too many. But as news from Libya retreats off the front page everyday, investors weigh it depressively less and less. No one knows what the next international incident will be, but chances are, the majority of these headlines were made in the first half.

6. Unemployment and Housing

Their numbers are not good. But investors don’t care about good vs. not good, they care about improvement vs. regression. Housing numbers are better over the last two months. Today’s ADP report on private sector growth came in twice as strong as analysts had forecast. Weekly initial jobless claims were at their lowest in seven weeks. If data in these two sectors can gain momentum, the market will react in kind.

7. The US budget

Washington worked over the 4th of July holiday in an attempt to hammer out a new budgetary plan. President Obama called today’s talks “constructive.” Reigning in of government spending will happen, making investors less nervous about the exploding federal deficit.

8. Overreaction

Americans were bombarded with “the sky is falling” propaganda during the second quarter. Housing and employment were in the pits, manufacturing dipped, GDP was under 2%, and institutional money drank the Kool-Aid that a double dip recession was in the cards. That will not happen. Yes, things are not where we want them to be and countless people are struggling right now. However, in the overall picture, unusually poor weather, speculative commodity plays, the above mentioned international factors, and other transitory factors were at work too, and things were never as bad as they were painted to be. Don’t agree? Watch as third quarter GDP will be better than the second quarter, and the fourth will be better than the third.

Time will tell if things come together and the market has a big second half. I think it will, and the wonderful businesses that comprise the best of Rule #1 investing are going to help head the charge. Look for big second half from wonderful tech and education businesses in particular.

What the numbers revealed was rather interesting; undervalued Rule #1 members had a return of 8.8%, not bad and ahead of the 6.5% S&P index benchmark. But the overvalued members, those trading above sticker price, are up 18.2%. Now this is something, aren’t the undervalued members supposed to go up and the overvalued members down?

Yes, but when viewed from a long-term perspective. If one really thinks about it, the results are not altogether surprising when taken in a six-month vacuum. Why? Because the market is going through a love affair with this particular batch of overvalued stocks, which is why their share prices became inflated to begin with. The reason they’re doing so well in 2011 is because the love affair hasn’t ended. But if there is one thing we learned from Mr. Town, it is that the market corrects. Sometimes it takes a year or multiple years, but it happens.

This is why five years from now, we can revisit these two groups of companies, the undervalued and the overvalued, and see where they are then. It is almost certain that this current collection of undervalued stocks will be far ahead in performance to the overvalued. Perhaps we’ll even see things more aligned by the end of this year.

Two quarters down, two to go in 2011. Find out the performances of all Rule #1 companies so far this year and who is best poised for big runs in the second half

Which Rule #1 company is up 100% year to date, and if their hot run will continue

Which Rule #1 company is up 34% over the past three weeks and why

The two Rule #1′s who scored big legal victories last week

Who hit a homerun at earnings

All undervalued Rule #1′s were up last week. See who had the biggest pop

This is just some of the stories we covered, read up on these events and much, much more!

What can not be debated is the effect QE2 had on the stock market. Although the program was not officially announced until the first week of November, stocks reversed their negative trend when the Central Bank hinted that a second round of quantitative easing looked to be in the cards. Mr. Market 2010 had been sluggish; down nearly 5% for the year until Bernanke began talking about a possible initiation of the policy in late August.

From August 27th until the end of QE2 yesterday, the Dow jumped 25.1%. This rally weathered a variety of depressive pressures, including the Japan tragedy, Libya, Greece, Egypt, Ireland, an in the tank housing market, an exploding federal deficit, and an unemployment rate that never dropped below 8.8%. Speaking strictly in terms of Rule #1 investing (politics and other issues aside), QE2 laid the groundwork for some nice wheeling and dealing.

The dip the market experienced through the first two plus quarters allowed for some bargain shopping after the robust rebound of 2009. Conceivably, stockpilers could have found desirable entry points and rode the wave, as many wonderful businesses added far more than 25% during this time. But now that QE2 has concluded and the market looks to close over 12,600, does this mean the party is over? What to do?

Rely on Rule #1 fundamentals, especially the long-term perspective of the philosophy (remember the 10-10 rule) and sticker price. Many wonderful businesses are still trading at 30, 40, and 50% of their intrinsic values, so there appears to be no reason to sell if this is the case with the business you own. And although QE2 served as a catalyst for a market rally, this week’s behavior by investors suggests that its completion will not spark a mass sell-off.

Which seven Rule #1 companies currently offer a greater than 50% margin of safety and have payback times of less than 10 years.

What 19 Rule #1 companies are currently undervalued by Mr. Market

What Rule #1 company is up 40% in June and why

How Rule #1 companies rate in the statistically category of “Managerial Effectiveness” which combines ROA, ROE, and ROIC values

What three Rule #1′s get a better than 30% return in each of these categories

What Rule #1 company just secured an oversees distribution deal

…and lots more!

NVE Corporation (NVE) develops and sells devices that use spintronics, a nanotechnology. The Company manufactures spintronic products, including sensors and couplers that are used to acquire and transmit data. NVE has also licensed its spintronic magnetoresistive random access memory technology (MRAM). In the Company’s products, the spintronic elements are connected to integrated circuitry. The Company’s designs are based on either giant magnetoresistance (GMR) or tunneling magnetoresistance.

Wonderful Business provided coverage on NVE Corp. from February 22, 2011 until our May 23rd (Issue 44) edition after the company had filed its annuals and it was discovered that their cash flow had only grown 2.8%. What was a shame is that due to what had been strong fundamentals and an awesome margin of safety (around 60%), we had NVEC as a top-ranked wonderful business and were surprised to find that they had cash generating difficulties. But that happens, and per our policy, when a business has lost its “Big Five” moat numbers, we see that as a red flag and move on.

But does one bad statistical year mean that NVE Corp. is no longer a buy? Not necessarily. NVEC made its run between August 31-January 14, gaining 67% in share price before cooling off and becoming stagnant over the past five months. But it appears that it still has room to grow, provided that it can rebound from its poor FY 2011. And the problem wasn’t relegated to cash; the company also saw earnings growth slow to 12%, sales 11%, and gross profit fall to 8%, so a definitive bounce back is in order if investors want to see that double in share price that its statistical intrinsic value suggests.

There are only two analysts that cover NVEC, and both believe the stock is headed upwards but differ in their opinion of how much. One analysts sees a 13% increase a year from now, another believes the stock will jump 31%. The company appears to be solid and undervalued, but strict Rule #1 investors may wish to pursue other options where historical record is more consistent.

When we released our first issue of 2011, there were 26 Rule #1 members, 16 of which were undervalued. To make the top ten among Rule #1′s in return on investment, a member needed a return of 20.6%. To make the top ten in equity growth rate, 24.8% was needed. And to make the best of the best of analyst projected growth, 21% was needed with only 4 members expected to grow earnings over 22% annually over the next five years.

Contrast these figures with just a half year later. We now provide coverage on 36 businesses, 19 of which are undervalued. To make the top ten in ROIC, a member needs a return of 25.9%. Equity growth rate must be over 30%. And now nine Rule #1′s are projected by analysts to grow at an annual rate of 22%.

Since the market crash, this has been the best time to be a Rule #1 investor. There are now more options, more bargains, and more sector diversity, and most importantly, these businesses have poised themselves for explosive future growth.

One Rule #1 company shot up 15% last week despite market depression. See what caused investors to flock to this stock

Two more Rule #1 companies crossed over the magical 50% margin of safety mark. See just how attractive they are to buy right now

See which Rule #1 has a HUGE earnings announcement due this coming week, and why their future success may lie with this report

Three of our top five ranked Wonderful Businesses received analyst upgrades this past week. See why they are so poised for future affluence

See which CEO of a top-ranked Wonderful Business has sold off some of his shares, why we don’t blame him, and why his company will have monster 3rd and 4th quarters

Wonderful Businesses is the online newsletter for the Rule #1 investor. Get all the businesses with the “Big Five” numbers, their sticker prices, margin of safety, news, analyst estimates, and more! All for the introductory rate of a one-time only payment of $29.95!