Markets & Economy

The U.S. stock market hit its year-ending lull after the S&P 500 returned an impressive 18.2% for 2017 as the final trading days wound down. Markets tend to end years on a positive note, and with tax cuts now a certainty, the good times may stretch into 2018. But just how long the rally can last is anyone's guess. Few would have predicted at the start of 2017 that the markets would end up where they are now. The Standard and Poor's 500 index is nearly 2700, far above the most optimistic analyst prediction (2400 by J.P. Morgan) at the start of the year.

This is an important reminder that predicting the market is almost impossible to do accurately and consistently over time, which is why investors need a disciplined long-term approach. Barry Ritholtz has described the year-end predilection for making next-year forecasts as "a prelude to looking foolish."

In this year-end review we highlight our best portfolios for 2017 and their longer-term performance to give a clearer picture of the track record for each strategy.

On the economic front, U.S. jobless claims for the week came in unchanged at 245,000 on Thursday. And sales of new U.S. single-family homes unexpectedly rose in November, hitting their highest level in more than a decade on robust demand. New homes sales last month jumped 17.5% to the highest level since July 2007 and new home sales were up 26.6% from a year ago.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose a stronger than expected 0.6% in November after a downwardly revised 0.2% increase in October. Spending on nondurable goods surged 1.2% and outlays on services rose 0.6%.

And with tax cuts coming, the U.S. government is saying the economy grew at a 3.2% annualized rate in the third quarter, and estimates for the fourth quarter to have growth as high as a 3.3% pace.

Recommended Reading

Here are some recent articles and blog posts in case you missed them:

New Fear Factor The VIX is pretty well-known by now, and it has spent a good chunk of this year at record lows, but a new fear gauge may be pointing to a shift in the market. It measures ambiguity, or the degree of uncertainty in the probabilities investors use to make decisions. And it's at an all-time high, meaning there may be more fear built into the market than previously thought. Read more

Prediction Fever - This is the time of year when economists and strategists can't resist predicting the outcome of the next year, and many will fall short of their marks. Barry Ritholtz argues this prediction fever is just a "prelude to looking foolish." Read more

No Bubble Here - Hedge fund manager Leon Cooperman says the market is reasonably valued, seeing no signs of an investor euphoria despite the 18% run up in the S&P 500 this year. The economy is gaining momentum and that is helping to lift corporate profits. Read more

No Tech Rotation? - The recent sell-off in tech stocks may have just been factor-based, not a broader rotation out of the sector to industries that should benefit immediately from tax cuts, as most people thought. Read more

Value Trap warnings - If you're worried that cheap stock you bought isn't rebounding, you could be in a value trap. Bloomberg recently wrote about the 12 warning signs a stock is actually a value trap. One big one: the CEO and chairman are the same person. Read more

Performance Update

Since our last newsletter, the S&P 500 returned 1.3%, while the Hot List returned 3.1%. So far in 2016, the portfolio has returned 18.8% vs. 20.0% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 267.7% vs. the S&P's 168.6% gain.

The Year in Review

The year is ending with tax cuts and a clearer expectation of the Federal Reserve's intentions to raise interest rates and rein in bond buying over the next 12 months. Economic growth in the U.S. and around the world gained momentum throughout 2017, fueling some eye-popping gains in global stock markets and encouraging optimism for consumers. Despite the political turbulence and early legislative failures by the Trump administration, December's passage of the tax plan was seen as a key victory that will propel the economy solidly into 2018.

It's time to review the overall performance of Validea's model portfolios. All but one of the 12 guru-inspired 10-stock monthly rebalanced portfolios was positive for the year, while the model tracking the style of Motley Fool, which is our best long term performer, was down 3.7% year to date. Overall, the group returned an average of 15.8%, not enough to match the 18.2% gain in the S&P 500 (our returns are price returns only). The Validea Hot List 10-stock portfolio returned 17%, up from its 9.9% return in 2016 but falling short of the market gain.

Validea's Top Performing Portfolio in 2017

The top performer of 2017 was our Momentum Investor Portfolio, which is based on Validea's proprietary model. The 10-stock basket is up 59.8% as of this writing and has gotten a big boost this year from its longest-held stock, Arista Networks (ANET). Shares of the cloud computing company were added in February and have returned 142.46% this year. Other big gainers this year include ADRs of the Argentinian bank Groupo Supervielle (SUPV), up 26.68%, and shares of the mortgage insurer Essent Group (ESNT), up 15.68%. Since 2003, the portfolio has returned 12% annually, beating the 7.1% gain in the S&P 500.

Except for Arista, the stocks in the momentum portfolio were added in the second half of the year, three of them in December, including Noah Holdings ADRs (NOAH), Toll Brothers (TOL), and Credicorp (BAP). The only portfolio holding that is negative is NetEase (NTES), the Chinese gaming and social media company, down 1.6%.

Biggest Turnaround

The Patient Investor portfolio inspired by the style of Warren Buffett experienced the biggest turnaround during the year, overcoming a loss of 5.8% in 2016 to return 30.6% this year. Since 2003, it has posted an annual 8.5% return. Shares of Ross Stores (ROST), which were added in 2012, lifted the portfolio this year, returning 165.04%. The Patient portfolio also got a boost from shares of Credit Acceptance Corp. (CACC), added this year and returning 64.91%. Another significant boost came from shares of Apple (AAPL), which Warren Buffett's Berkshire Hathaway has been buying. The computer company is up 34.25% this year. On the downside, shares of Nic Inc. (EGOV) are down 22.33%, and shares of Masimo (MASI) are down 0.38%.

Top Performing Investment Style

In a year when high-growth tech stocks grabbed most of the headlines, some value-oriented strategies also did well. Three of the four top performing Validea models were momentum and value, with growth nestling in there at number three. After the leading Momentum style and the Buffett-inspired Patient Investor model, the Growth model following Martin Zweig came in up 23.5% followed by the Contrarian Investor style of David Dreman, up 21.6%.

The Contrarian style did well in the four years ending 2007, a time of rising interest rates when value and international stocks outperformed. Since 2003 it has returned an average of 5.7% a year. But the pendulum may be swinging back in that direction, as it seemed to indicate at the end of last year, despite this year's noted run up in growth-oriented tech stocks. The model tracks the style of David Dreman, who believed investors overreact in predictable ways, giving popular stocks too much credit and undervaluing stocks considered to be "the worst." He focused on stocks in that second group, the ones with low multiples that otherwise should be performing better based on the company's profit margins and debt ratios. Except for ADRs of Chilean electricity producer Enel Generacion Chile SA (EOCC), which are up 10.28%, all of the holdings in the Contrarian Portfolio were added in the second half of this year. The best showing has been Embraer SA (ERJ), the Brazilian aerospace conglomerate, up 29.93%. The worst among the contrarian stock holdings: Micron Technology (MU), down 7.97% after being added to the portfolio in November.

Validea's Martin Zweig-inspired Growth Investor Portfolio is mostly made up of financial stocks, a nod to the expected boost deregulation is going to bring to the U.S. banking sector. Zweig, author of the book "Winning on Wall Street," didn't like to overpay for growth stocks, so he would look at names that had relatively modest multiples and low debt-to-equity ratios compared to industry averages. The portfolio's best performing stock this year is IPG Photonics (IPGP), a maker of fiber lasers, up 60.47%. Shares of SVP Financial (SIVB) are up 38.46%, and shares of Bank of the Ozarks (OZRK) are up 28.19%. Its worst-performers are shares of Eagle Bancorp (EGBN), down 15.13% and Facebook (FB), down 0.77% since it added it.

Most Consistent Portfolio Performance

Once again the Motley Fool-inspired Small-Cap Growth Investor Portfolio is tops in the annual return category. It is up 13.8% annually since its 2003 inception, beating the 7.1 percent annual gain in the S&P 500 in the same time frame. This model tracks the book ok David and Tom Gardner, the cofounders of the Motley Fool, who look for stocks of fast-growing companies with good fundamentals. But for this year, the portfolio is down 3.7% and the only one of the 12 guru-inspired models to post a negative number. This is a great example of how a strategy that has worked over the long term, and is one of the very best and actually most consistent, can fall out of favor. The one thing I know for sure when it comes to running these fundamentally based models is that all of them will have periods of below market returns. When that happens, most investors aren't patient and will jump ship. This ebb and flow of outperformance and underperformance can be difficult and it takes discipline to see through these short and medium term periods of lackluster returns.

The Hot List Portfolio

Validea's flagship portfolio notched a 17% gain this year, which was not quite enough to beat the S&P 500. Its biggest boost for the year came from shares of Sanderson Farms (SAFM), a poultry processor up 74.28%. Other gains came from holdings of Magna International (MGA), an automotive supplier up 22.92%, and homebuilder LGI Homes (LGIH), up 18.8%.

Since 2003, the Hot List portfolio has gained an average of 9.4% a year versus the market's average gain of 7.1%. Its biggest loss was in 2008 (35%) against the market's 38.5% decline.

Portfolio Holdings
Ticker Date Added Return
THO 10/20/2017 15.8%
NTES 11/17/2017 -4.8%
TOL 12/15/2017 1.7%
SIG 10/20/2017 -15.2%
CTB 9/22/2017 1.0%
MGA 6/2/2017 23.3%
UFPI 12/15/2017 0.4%
BMA 12/15/2017 1.4%
LGIH 11/17/2017 21.2%
SAFM 11/18/2016 75.0%


Guru Analysis
Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer

THO   |   NTES   |   TOL   |   SIG   |   CTB   |   MGA   |   UFPI   |   BMA   |   LGIH   |   SAFM   |  

THOR INDUSTRIES, INC.

Strategy: Growth/Value Investor
Based on: James P. O'Shaughnessy

Thor Industries, Inc. manufactures a range of recreational vehicles (RVs) in the United States and sells those vehicles primarily in the United States and Canada. The Company's segments include towable recreational vehicles, which consists of the operations of Airstream, Inc. (Airstream) (towable); Heartland Recreational Vehicles, LLC (Heartland) (including Bison Coach, LLC (Bison), Cruiser RV, LLC (CRV) and DRV, LLC (DRV)); Jayco, Corp. (Jayco) (including Jayco towable, Starcraft and Highland Ridge), Keystone RV Company (Keystone) (including CrossRoads and Dutchmen) and K.Z., Inc. (KZ) (including Livin' Lite RV, Inc. (Livin' Lite)); motorized recreational vehicles, which consists of the operations of Airstream (motorized), Jayco (including Jayco motorized and Entegra Coach) and Thor Motor Coach, Inc. (Thor Motor Coach), and Other, which includes the operations of its subsidiary, Postle Operating, LLC (Postle).


MARKET CAP: PASS

The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. THO, with a market cap of $8,063 million, passes this criterion.


EARNINGS PER SHARE PERSISTENCE: PASS

The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. THO, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 2.86, 3.29, 3.79, 4.91 and 7.09, passes this test.


PRICE/SALES RATIO: PASS

The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. THO's Price/Sales ratio of 1.04, based on trailing 12 month sales, passes this criterion.


RELATIVE STRENGTH: PASS

The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. THO, whose relative strength is 84, is in the top 50 and would pass this last criterion.

NETEASE INC (ADR)

Strategy: Contrarian Investor
Based on: David Dreman

NetEase, Inc. (NetEase) is a technology company. The Company operates an interactive online community in China and is a provider of Chinese language content and services through its online games, Internet media, e-mail, e-commerce and other businesses. The Company operates through three segments: Online Game Services; Advertising Services, and E-mail, E-commerce and Others. Its online games business primarily focuses on offering personal computer (PC)-client massively multi-player online role-playing games (PC-client MMORPGs), as well as mobile games to the Chinese market. The NetEase Websites provide Internet users with Chinese language online services centered over three core service categories, which include content, community and communication. Its online advertising offerings include banner advertising, direct e-mail, sponsored special events, games, contests and other activities. It offers free and fee-based premium e-mail services to its individual users and corporate users.

MARKET CAP: PASS

Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. NTES has a market cap of $46,229 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. NTES's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.12, 2.92 have been increasing, and therefore the company passes this test.


EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: PASS

This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. NTES passes this test as its EPS growth rate over the past 6 months (1,985.71%) has beaten that of the S&P (12.22%). NTES's estimated EPS growth for the current year is (17,011.32%), which indicates the company is expected to experience positive earnings growth. As a result, NTES passes this test.


This methodology would utilize four separate criteria to determine if NTES is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest".


P/E RATIO: FAIL

The P/E of a company should be in the bottom 20% of the overall market. NTES's P/E of 23.13, based on trailing 12 month earnings, is higher than the bottom 20% criterion (below 14.15), and therefore fails this test.


PRICE/CASH FLOW (P/CF) RATIO: FAIL

The P/CF of a company should be in the bottom 20% of the overall market. NTES's P/CF of 21.75 does not meet the bottom 20% criterion (below 7.64), and therefore fails this test.


PRICE/BOOK (P/B) VALUE: FAIL

The P/B value of a company should be in the bottom 20% of the overall market. NTES's P/B is currently 6.68, which does not meet the bottom 20% criterion (below 1.13), and it therefore fails this test.


PRICE/DIVIDEND (P/D) RATIO: FAIL

The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). NTES's P/D of 96.15 does not meet the bottom 20% criterion (below 20.70), and it therefore fails this test.


This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below.


CURRENT RATIO: PASS

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.43] or greater than 2). This is one identifier of financially strong companies, according to this methodology. NTES's current ratio of 2.93 passes the test.


PAYOUT RATIO: PASS

A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for NTES is 0.00%. Unfortunately, its historical payout ratio is not available. Nonetheless it passes the payout criterion, as this is a very low payout.


RETURN ON EQUITY: PASS

The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 17.42%, and would consider anything over 27% to be staggering. The ROE for NTES of 32.76% is high enough to pass this criterion.


PRE-TAX PROFIT MARGINS: PASS

This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. NTES's pre-tax profit margin is 31.04%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. NTES's current yield is 1.04%, while the market yield is 2.37%. NTES fails this test.


LOOK AT THE TOTAL DEBT/EQUITY: PASS

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 99.73%. NTES's Total Debt/Equity of 12.74% is considered acceptable.

TOLL BROTHERS INC

Strategy: Growth/Value Investor
Based on: James P. O'Shaughnessy

Toll Brothers, Inc. is engaged in designing, building, marketing, selling and arranging financing for detached and attached homes in luxury residential communities. The Company operates through two segments: Traditional Home Building and Toll Brothers City Living (City Living). Within the Traditional Home Building segment, it operates in five geographic segments in the United States: the North, consisting of Connecticut, Illinois, Massachusetts, Michigan, Minnesota, New Jersey and New York; the Mid-Atlantic, consisting of Delaware, Maryland, Pennsylvania and Virginia; the South, consisting of Florida, North Carolina and Texas; the West, consisting of Arizona, Colorado, Nevada and Washington, and California. City Living is the Company's urban development division. Its products include Traditional Home Building Product and City Living Product. Its Traditional Home Building Product includes detached homes, move-up, executive, estate, and active-adult and age-qualified lines of home.


MARKET CAP: PASS

The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. TOL, with a market cap of $7,675 million, passes this criterion.


EARNINGS PER SHARE PERSISTENCE: PASS

The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. TOL, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.97, 1.84, 1.98, 2.18 and 3.17, passes this test.


PRICE/SALES RATIO: PASS

The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. TOL's Price/Sales ratio of 1.32, based on trailing 12 month sales, passes this criterion.


RELATIVE STRENGTH: PASS

The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. TOL, whose relative strength is 85, is in the top 50 and would pass this last criterion.

SIGNET JEWELERS LTD.

Strategy: Value Investor
Based on: Benjamin Graham

Signet Jewelers Limited is a retailer of diamond jewelry. The Company's segments include the Sterling Jewelers division; the Zale division, which consists of the Zale Jewelry and Piercing Pagoda segments; the UK Jewelry division, and Other. The Sterling Jewelers division's stores operate in the United States principally as Kay Jewelers (Kay), Kay Jewelers Outlet, Jared The Galleria Of Jewelry (Jared) and Jared Vault. The Zale division operates jewelry stores (Zale Jewelry) and kiosks (Piercing Pagoda), located primarily in shopping malls across the United States, Canada and Puerto Rico. Zale Jewelry includes the United States store brand, Zales, and the Canadian store brand, Peoples Jewellers. Piercing Pagoda operates through mall-based kiosks. The UK Jewelry division operates stores in the United Kingdom, Republic of Ireland and Channel Islands. The Other segment includes the operations of subsidiaries involved in the purchasing and conversion of rough diamonds to polished stones.


SECTOR: PASS

SIG is neither a technology nor financial Company, and therefore this methodology is applicable.


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $1 billion. SIG's sales of $6,229.8 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: PASS

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. SIG's current ratio of 2.63 passes the test.


LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: PASS

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for SIG is $696.8 million, while the net current assets are $2,144.7 million. SIG passes this test.


LONG-TERM EPS GROWTH: PASS

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 10 years. We have data for 7 years, and have adjusted this requirement to be a 21% gain over the 7 year period. Companies with this type of growth tend to be financially secure and have proven themselves over time. SIG's EPS growth over that period of 122.7% passes the EPS growth test.


P/E RATIO: PASS

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. SIG's P/E of 9.71 (using the current PE) passes this test.


PRICE/BOOK RATIO: PASS

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. SIG's Price/Book ratio is 1.58, while the P/E is 9.71. SIG passes the Price/Book test.

COOPER TIRE & RUBBER CO

Strategy: Growth Investor
Based on: Martin Zweig

Cooper Tire & Rubber Company is a manufacturer and marketer of replacement tires. The Company specializes in the design, manufacture, marketing and sales of passenger car, light truck, medium truck, motorcycle, and racing tires. The Company operates through four segments: North America, Latin America, Europe, and Asia. The North America segment comprises its operations in the United States and Canada. The Americas Tire Operations segment manufactures and markets passenger car and light truck tires, for sale in the United States replacement markets. The Latin America segment comprises its operations in Mexico, Central America, and South America. The European segment has operations in the United Kingdom and the Republic of Serbia. Its the United Kingdom entity manufactures and markets passenger car, light truck, motorcycle and racing tires and tire retread material. As of December 31, 2016, the Company operated nine manufacturing facilities and 20 distribution centers in 10 countries.


P/E RATIO: PASS

The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. CTB's P/E is 9.22, based on trailing 12 month earnings, while the current market PE is 26.00. Therefore, it passes the first test.


REVENUE GROWTH IN RELATION TO EPS GROWTH: FAIL

Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. CTB's revenue growth is -5.38%, while it's earnings growth rate is 15.38%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, CTB fails this criterion.


SALES GROWTH RATE: PASS

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (-2.3%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-2.6%) of the current year. Sales growth for the prior must be greater than the latter. For CTB this criterion has been met.


The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria.


CURRENT QUARTER EARNINGS: PASS

The first of these criteria is that the current EPS be positive. CTB's EPS ($1.18) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. CTB's EPS for this quarter last year ($0.90) pass this test.


POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS

The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. CTB's growth rate of 31.11% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: FAIL

Compare the earnings growth rate of the past four quarters with long-term EPS growth rate. Earnings growth in the past 4 quarters should be at least half of the long-term EPS growth rate. A stock should not be considered if it posted several quarters of skimpy earnings. CTB had 2 quarters of skimpy growth in the last 2 years.


This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below.


EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: PASS

If the growth rate of the prior three quarter's earnings, -19.64%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 31.11%, (versus the same quarter one year ago) then the stock passes.


EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: PASS

The EPS growth rate for the current quarter, 31.11% must be greater than or equal to the historical growth which is 15.38%. CTB would therefore pass this test.


EARNINGS PERSISTENCE: FAIL

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. CTB, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 3.49, 1.73, 3.42, 3.69, and 4.51, fails this test.


LONG-TERM EPS GROWTH: PASS

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. CTB's long-term growth rate of 15.38%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.


TOTAL DEBT/EQUITY RATIO: PASS

A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. CTB's Debt/Equity (28.43%) is not considered high relative to its industry (59.55%) and passes this test.


INSIDER TRANSACTIONS: PASS

A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For CTB, this criterion has not been met (insider sell transactions are 159, while insiders buying number 275). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.

MAGNA INTERNATIONAL INC. (USA)

Strategy: Growth/Value Investor
Based on: James P. O'Shaughnessy

Magna International Inc. (Magna) is a global automotive supplier. The Company's segments are North America, Europe, Asia, Rest of World, and Corporate and Other. The Company's product capabilities include producing body, chassis, exterior, seating, powertrain, electronic, active driver assistance, vision, closure, and roof systems and modules, as well as vehicle engineering and contract manufacturing. The Company has over 320 manufacturing operations and approximately 100 product development, engineering and sales centers in over 30 countries. It provides a range of body, chassis and engineering solutions to its original equipment manufacturer (OEM) customers. It has capabilities in powertrain design, development, testing and manufacturing. It offers bumper fascia systems, exterior trim and modular systems. It offers exterior and interior mirror systems. It offers sealing, trim, engineered glass and module systems. It offers softtops, retractable hardtops, modular tops and hardtops.


MARKET CAP: PASS

The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. MGA, with a market cap of $20,545 million, passes this criterion.


EARNINGS PER SHARE PERSISTENCE: PASS

The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. MGA, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 3.05, 3.38, 4.44, 4.72 and 5.16, passes this test.


PRICE/SALES RATIO: PASS

The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. MGA's Price/Sales ratio of 0.54, based on trailing 12 month sales, passes this criterion.


RELATIVE STRENGTH: PASS

The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. MGA, whose relative strength is 73, is in the top 50 and would pass this last criterion.

UNIVERSAL FOREST PRODUCTS, INC.

Strategy: Growth Investor
Based on: Martin Zweig

Universal Forest Products, Inc. is a holding company. The Company, through its subsidiaries, supplies wood, wood composite and other products to three primary markets, such as retail, construction and industrial. Its segments include North, South, West, Alternative Materials, International, idX Holdings, Inc. (idX) and Corporate divisions. idX is a designer, manufacturer and installer of in-store environments. It designs, manufactures and markets wood and wood-alternative products for national home centers and other retailers; structural lumber and other products for the manufactured housing industry; engineered wood components for residential and commercial construction; specialty wood packaging, components and packing materials for various industries, and customized interior fixtures used in a range of retail stores, commercial and other structures. Its customers comprising retail market are national home center retailers and retail-oriented regional lumberyards, among others.


P/E RATIO: PASS

The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. UFPI's P/E is 21.47, based on trailing 12 month earnings, while the current market PE is 26.00. Therefore, it passes the first test.


REVENUE GROWTH IN RELATION TO EPS GROWTH: FAIL

Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. UFPI's revenue growth is 11.21%, while it's earnings growth rate is 52.39%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, UFPI fails this criterion.


SALES GROWTH RATE: PASS

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (27.8%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (23%) of the current year. Sales growth for the prior must be greater than the latter. For UFPI this criterion has been met.


The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria.


CURRENT QUARTER EARNINGS: PASS

The first of these criteria is that the current EPS be positive. UFPI's EPS ($0.55) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. UFPI's EPS for this quarter last year ($0.45) pass this test.


POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS

The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. UFPI's growth rate of 22.22% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: FAIL

Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for UFPI is 26.19%. This should be less than the growth rates for the 3 previous quarters which are 13.33%, 6.25% and 0.00%. UFPI does not pass this test, which means that it does not have good, reasonably steady earnings.


This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below.


EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: PASS

If the growth rate of the prior three quarter's earnings, 5.13%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 22.22%, (versus the same quarter one year ago) then the stock passes.


EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: FAIL

The EPS growth rate for the current quarter, 22.22% must be greater than or equal to the historical growth which is 52.39%. Since this is not the case UFPI would therefore fail this test.


EARNINGS PERSISTENCE: PASS

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. UFPI, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.40, 0.72, 0.95, 1.31 and 1.65, passes this test.


LONG-TERM EPS GROWTH: PASS

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. UFPI's long-term growth rate of 52.39%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.


TOTAL DEBT/EQUITY RATIO: PASS

A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. UFPI's Debt/Equity (18.67%) is not considered high relative to its industry (114.21%) and passes this test.


INSIDER TRANSACTIONS: PASS

A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For UFPI, this criterion has not been met (insider sell transactions are 345, while insiders buying number 1,040). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.

BANCO MACRO SA (ADR)

Strategy: P/E/Growth Investor
Based on: Peter Lynch

Banco Macro SA is an Argnetina-based financial institution (the Bank) that offers traditional bank products and services to companies, including those operating in regional economies, as well as to individuals. In addition, the Bank performs certain transactions through its subsidiaries, including mainly Banco del Tucuman, Macro Bank Ltd, Macro Securities SA, Macro Fiducia SA and Macro Fondos SGFCI SA. It has approximately two categories of customers, such as retail customers, including individuals and entrepreneurs and corporate customers, which include small, medium and large companies and major corporations. In addition, it provides services to over four provincial governments. It provides its corporate customers with traditional banking products and services, such as deposits, lending (including overdraft facilities), check cashing advances and factoring, guaranteed loans and credit lines for financing foreign trade and cash management services.


DETERMINE THE CLASSIFICATION:

This methodology would consider BMA a "fast-grower".


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (17.21) relative to the growth rate (40.57%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for BMA (0.42) is very favorable.


SALES AND P/E RATIO: PASS

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. BMA, whose sales are $1,727.8 million, needs to have a P/E below 40 to pass this criterion. BMA's P/E of (17.21) is considered acceptable.


EPS GROWTH RATE: PASS

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for BMA is 40.6%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

BMA is a financial company so debt to equity rules are not applied to determine the company's financial soundness.


EQUITY/ASSETS RATIO: PASS

This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. BMA's Equity/Assets ratio (19.00%) is very healthy and above the minimum 5% this methodology looks for, thus passing the criterion.


RETURN ON ASSETS: PASS

This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. BMA's ROA (4.70%) is above the minimum 1% that this methodology looks for, thus passing the criterion.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for BMA (8.67%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for BMA (-6.90%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.

LGI HOMES INC

Strategy: Growth Investor
Based on: Martin Zweig

LGI Homes, Inc. is a homebuilder and land developer. The Company is engaged in the design, construction, marketing and sale of new homes in markets in Texas, Arizona, Florida, Georgia, New Mexico, South Carolina, North Carolina, Colorado, Washington and Tennessee. The Company operates through five segments: the Texas division, the Southwest division, the Southeast division, the Florida division and the Northwest division. The Texas division includes homebuilding operations in Houston, Dallas/Fort Worth, San Antonio and Austin locations. The Southwest division includes homebuilding operations in Phoenix, Tucson, Albuquerque, Denver and Colorado Springs locations. The Southeast division includes homebuilding operations in Atlanta, Charlotte and Nashville locations. The Florida division includes homebuilding operations in Tampa, Orlando, Fort Myers and Jacksonville locations. The Northwest division includes homebuilding operations in Seattle location.


P/E RATIO: PASS

The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. LGIH's P/E is 17.88, based on trailing 12 month earnings, while the current market PE is 26.00. Therefore, it passes the first test.


REVENUE GROWTH IN RELATION TO EPS GROWTH: PASS

Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. LGIH's revenue growth is 76.43%, while it's earnings growth rate is 63.45%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, LGIH passes this criterion.


SALES GROWTH RATE: PASS

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (69.2%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (45.6%) of the current year. Sales growth for the prior must be greater than the latter. For LGIH this criterion has been met.


The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria.


CURRENT QUARTER EARNINGS: PASS

The first of these criteria is that the current EPS be positive. LGIH's EPS ($1.40) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. LGIH's EPS for this quarter last year ($0.86) pass this test.


POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS

The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. LGIH's growth rate of 62.79% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: FAIL

Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for LGIH is 31.73%. This should be less than the growth rates for the 3 previous quarters which are 38.89%, -8.77% and 43.75%. LGIH does not pass this test, which means that it does not have good, reasonably steady earnings.


This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below.


EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: PASS

If the growth rate of the prior three quarter's earnings, 28.89%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 62.79%, (versus the same quarter one year ago) then the stock passes.


EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: FAIL

The EPS growth rate for the current quarter, 62.79% must be greater than or equal to the historical growth which is 63.45%. Since this is not the case LGIH would therefore fail this test.


EARNINGS PERSISTENCE: PASS

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. LGIH, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.50, 1.07, 1.33, 2.44 and 3.41, passes this test.


LONG-TERM EPS GROWTH: PASS

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. LGIH's long-term growth rate of 63.45%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.


TOTAL DEBT/EQUITY RATIO: FAIL

A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. LGIH's Debt/Equity (103.90%) is considered high relative to its industry (50.24%) and fails this test.


INSIDER TRANSACTIONS: PASS

A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For LGIH, this criterion has not been met (insider sell transactions are 75, while insiders buying number 40). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.

SANDERSON FARMS, INC.

Strategy: Value Investor
Based on: Benjamin Graham

Sanderson Farms, Inc. is a poultry processing company. The Company is engaged in the production, processing, marketing and distribution of fresh and frozen chicken, and also preparation, processing, marketing and distribution of processed and minimally prepared chicken. It sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, under the Sanderson Farms brand name to retailers, distributors, casual dining operators, customers reselling frozen chicken into export markets. The Company, through its subsidiaries, Sanderson Farms, Inc. (Production Division) and Sanderson Farms, Inc. (Processing Division), conducts its chicken operations. Sanderson Farms, Inc. (Production Division) is engaged in the production of chickens to the broiler-stage. Sanderson Farms, Inc. (Foods Division) is engaged in the processing, sale and distribution of chickens. The Company, through Sanderson Farms, Inc. (Foods Division), conducts its prepared chicken business.


SECTOR: PASS

SAFM is neither a technology nor financial Company, and therefore this methodology is applicable.


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $1 billion. SAFM's sales of $3,342.2 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: PASS

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. SAFM's current ratio of 4.28 passes the test.


LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: PASS

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for SAFM is $0.0 million, while the net current assets are $650.8 million. SAFM passes this test.


LONG-TERM EPS GROWTH: FAIL

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 10 years. EPS for SAFM were negative within the last 10 years and therefore the company fails this criterion.


P/E RATIO: PASS

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. SAFM's P/E of 14.10 (using the 3 year PE) passes this test.


PRICE/BOOK RATIO: FAIL

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. SAFM's Price/Book ratio is 2.26, while the P/E is 14.10. SAFM fails the Price/Book test.


Watch List

The top scoring stocks not currently in the Hot List portfolio.

Ticker Company Name Current
Score
UTHR UNITED THERAPEUTICS CORPORATION 100%
FL FOOT LOCKER, INC. 72%
MCK MCKESSON CORPORATION 66%
SLF SUN LIFE FINANCIAL INC 65%
FIZZ NATIONAL BEVERAGE CORP. 63%
MASI MASIMO CORPORATION 62%
LMAT LEMAITRE VASCULAR INC 60%
PAYC PAYCOM SOFTWARE INC 59%
PETS PETMED EXPRESS INC 54%
MAN MANPOWERGROUP INC. 54%



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