Economy & Markets

There have been plenty of headlines over the past few weeks on both the macro and company specific front. The tough trade talk has been somewhat muted, and the press mostly focused on the Robert Mueller testimony to Congress earlier in the week.

This morning it was reported that U.S. GDP grew at a 2.1% rate in the second quarter, which was slightly above market forecasts, but below the 3.1% in the first quarter. Keep in mind, quarterly GDP numbers are often revised significantly, so we may find higher or lower growth once the final tally is in.

The ECB, which is European Union's Central Bank, signaled interest rates could stay low or go even lower as it tries to head off slower growth and the potential negative economic impact from Brexit. Bloomberg reported earlier this week that there is nearly $13 trillion in negative yielding debt around the world, with a good portion of that coming from Europe. That number will likely increase given the ECB's stance on rates.

Here at home, the market seems to be anticipating lower rates from the Federal Reserve as well. These expectations have helped stocks move to all-time highs. The S&P 500 now trades at over 3,000 and the Dow Jones Industrial Average trades above 27,000.

We're in the heart of earnings season and large cap technology names and growth stocks are in focus. Google reported a solid quarter, while Amazon's profits came in below market expectations.

From a valuation perspective, the market looks fairly priced. You can always check the latest valuation using Validea's Market Valuation tool, where we track value based on earnings and other factors and allow you to compare various segments of the market against each other.

Here are some of the things we've been reading as of late:

The Lure of the Unsolvable Problem - Validea's Jack Forehand discusses the unsolvable problem in investing, and he wouldn't want it any other way. Read More.

Recession Watch - No recession in site, at least according to Google Search Trends. Read More.

Fees - Mutual fund fees have been on the decline for seven years, and the trend isn't expected to slow. Read More.

Greenblatt & Common Investing Sense - Investing Insights from Joel Greenblatt. Greenblatt always has a way to make successful investing sound simple, if you follow some common sense rules. Read More.

VC Model - Andreessen Horowitz once again "Blows Up" the VC model. Converts their firm into an investment advisory, as outlined in Forbes. Read More.

Dalio & Gold - Billionaire investor Ray Dalio believes that the push by central banks toward policies that devalue currencies is about to cause a shift in investing toward assets such as gold. Read More.

Gundlach on Markets - In an interview with Yahoo Finance earlier this year, DoubleLine Capital CEO Jeffrey Gundlach outlines why the next recession could be very painful. Debt plays a big role. Read More.

Smart Money - New studies show that the "so-called smart money is prone to many of the same errors as amateurs," writes Wall Street Journal columnist Jason Zweig. Read More.

Buffett Pupil - In a recent WealthTrack interview with Consuelo Mack, veteran investor Tom Russo discussed why he has continued to follow Warren Buffett's investing principles for over three decades. We've got the highlights. Read More.

Value Lagging - Value investing has been a losing strategy in recent years, and value stocks are currently trading at the steepest discount in history. Read More.

Interest Rates - A recent article in Bloomberg discusses the outlook for the federal deficit and potential repercussions with respect to interest rates. Rates may be lower for a lot longer. Read More.

CAPM - A new paper argues that factor investing challenges the decades-old Capital Asset Pricing Model (CAPM), according to an article in Institutional Investor. Read More.

Deep Value Investing - In a recent interview with Bloomberg TV, deep value investor Tobias Carlisle explained his macro approach, as well as the strategy behind his firm's ETF. Carlisle, founder and portfolio manager at Acquirers Funds, explained that he seeks "strong businesses that are throwing off cash and buying back stock, very traditional long side for value." Read More.


The Fallen

As we rebalance the Validea Hot List, 3 stocks leave our portfolio. These include: Bbva Banco Frances S.a. (Adr) (BBAR), Foot Locker, Inc. (FL) and D. R. Horton Inc (DHI).

The Keepers

7 stocks remain in the portfolio. They are: Credit Acceptance Corp. (CACC), Emcor Group Inc (EME), Banco Macro Sa (Adr) (BMA), Mastercard Inc (MA), Lpl Financial Holdings Inc (LPLA), Monster Beverage Corp (MNST) and Nk Lukoil Pao (Adr) (LUKOY).

The New Additions

We are adding 3 stocks to the portfolio. These include: Telefonica S.a. (Adr) (TEF), Aaon, Inc. (AAON) and Intelligent Systems Corporation (INS).

Latest Changes

Additions  
TELEFONICA S.A. (ADR) TEF
AAON, INC. AAON
INTELLIGENT SYSTEMS CORPORATION INS
Deletions  
BBVA BANCO FRANCES S.A. (ADR) BBAR
FOOT LOCKER, INC. FL
D. R. HORTON INC DHI

Momentum Investing - the What, the Why, the How and the Risks

In the commentary below, we take a look at momentum as a style and some of the strategies on Validea that utilize momentum like investment criteria. The number of models that incorporate momentum may be a surprise to you.

At the most basic level, momentum investing in the context of security selection can be defined as buying securities that have done the best over the past 12 months and selling those that have done the worst. While there are multiple methods and timeframes used to measure momentum, which we'll get into below, the idea of buying based on price strength and selling based on price weakness is at the core of momentum investing.

One thing is clear so far in 2019: stocks with strong price momentum are leading the way. Of the top 10 performing model portfolios we run, 6 of them have a strong momentum component as part of the stock selection process. And the recent performance is a continuation of the last few years, where momentum has been robust and other investing styles, like value, have struggled.

No active quantitative strategy works all the time or stays on top forever, but since 2003 some of the very best performing models we track have a momentum criteria baked into them. We couldn't have predicted that then, nor can we predict whether it will continue going forward, but the recent performance of momentum gives us an opportunity to talk about this style of investing, the theories behind why momentum has the potential to work, how momentum can be measured, the risks of momentum (and there are plenty), and how momentum can be combined with other fundamental factors to aid in stock selection.

Momentum Model Portfolios on Validea - YTD Returns

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The table above lists focused 10 stock model portfolios run on Validea. The returns in the table don't represent actual returns. These portfolios are not endorsed or approved by the individuals in the table. All of our models are based on publicly disclosed strategies outlined by these individuals in books or academic papers.

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For many investors, particularly fundamentalists that look to buy good companies at attractive prices, momentum-based investing can be difficult to comprehend because it lacks a clear connection to the ultimate value of the underlying business and the economic drivers of value.

However, momentum tends to be one of the most robust market anomalies and has been verified over the long term academically. As Eugene Fama, "father of modern finance", outlined in this paper, which highlights past research and his own findings ...

"stocks with low returns over the past year tend to have low returns for the next few months, and stocks with high past returns tend to have high future returns."

Dissecting Anomalies, THE JOURNAL OF FINANCE - VOL. LXIII, NO. 4 - AUGUST 2008

Asking "Why" is Paramount

To understand momentum, let's start by learning from others who've studied the factor extensively and who have implemented it themselves.

In the Curious Investor podcast with Cliff Asness, co-founder and Managing Principal at AQR, and Wes Gray, CEO of the quantitative investment firm Alpha Architect, we get some very valuable insights on momentum. Asness and Gray are considered authorities on investment factors such as momentum and value.

As they pointed out, thinking about the "why" behind momentum -- whether it's risk-based, behavioral or some combination of the two -- is an important exercise.

The risk-based theory would say momentum is riskier and therefore in order to compensate investors for that risk, momentum stocks need to present a higher return. Ok, that makes sense.

But as the two practitioners discuss in the podcast, the behavior explanations tend to be a little deeper and perhaps offer better explanations about the drivers of momentum.

Possible Drivers of Momentum Premium ...

  • Under-reaction: Investors tend to under-react to good news. So for instance, if a company increases earnings guidance it takes time for that positive development to be totally embraced by the market. As a result, a stock may exhibit an upward move and continue upward as the market and investors digest the good news.
  • Over-reaction: Another is somewhat the opposite of the above. As a stocks exhibit positive price increases, investors look at that and buy more, this creating an almost herding like effect based on strong recent price movement.
  • Disposition Effect: Investors tend to hang onto losing positions and sell winners prematurely. Known in behavioral finance as the "disposition effect", this is theorized to have a positive impact for stocks with momentum. Larry Swedroe's piece on ETF.com has more on this.
  • Theory of Reflexivity: In the podcast, Dr. Gray mentions one other reason, which is an interesting idea, where he suggests you invert the problem. Rather than momentum reflecting positive future outcomes for the company, what if momentum in and of itself drove those positive outcomes. For example, if a company's stock price doubles that company may be able to attract the best employees with stock options, have more optionality to use its stock for acquisitions or have more leeway to make bold and innovative bets that another company with a lagging stock price may not.

How to Measure It

Now that we have some of the theories on why momentum may work, let's looks at how momentum is measured.

  • Relative Strength: Relative strength is simply a measure, on a scale of 0-100, of a stock's relative price strength compared to all other stocks. You can measure relative strength over any period of time, say 3 months, 6 months or 12 months. Our models such as the Small Cap Growth, Momentum, Growth/Value (based on Jim O'Shaughnessy's Cornerstone Growth model), Millennial and Shareholder Yield use a 12 month relative strength rating and stocks generally have to obtain a score of 90 or better to obtain 100% from either model.
  • Industry Relative Strength: This metric uses relative strength at an industry level to identify those industries exhibiting strong price performance. Validea's Momentum model uses this.
  • Twelve Month Minus One Month Momentum: Most tests on momentum show the factor is not persistent in the very short term or in periods of greater than a year. This measure takes that into consideration by looking at a stock's return over the past 12 months while at the same time excluding the most recent month. In the Validea system, stocks are then percentile ranked as a way to identify those names with the highest momentum. Our strategies that use this include Twin Momentum, Quantitative Momentum and the Multi-Factor model.

There are other ways to screen for momentum as well, including percent above or below 52-week highs and percent above or below 200 or 50 day moving averages. These are included in Validea's stock screening application under the Momentum and Price Criteria filter.

Combining Momentum with Fundamental Factors

The majority of models captured by Validea utilize momentum in combination with other investment criteria. The one model that may be considered pure momentum is the Quantitative momentum model, based on Dr. Gray's book, Quantitative Momentum, but even that model uses the consistency of returns as a way to reward stocks with more price return consistency.

A good example of a model that uses momentum along with a host of other factors is our Small Cap Growth model based on investment strategy outlined in the book, The Motley Fool Investment Guide. This model looks for small cap growth stocks with solid fundamentals and strong price performance. To obtain 100% based on the model, stocks need to pass all of the hurdles mentioned below, which include a relative strength minimum of at least 90. What is interesting about this particular model is that it has shown the most consistency in terms of outperformance vs. many of our other models. In my opinion, part of that has to do with the momentum or relative strength component, which has tended to keep the model from picking stocks that go on to see large declines.

Here are the criteria in the Small Cap Growth Investor Model

  1. Profit Margin
  2. Relative Strength - 90% or higher needed in order to get 100% score from the model
  3. Compare Sales And Eps Growth To The Same Period Last Year
  4. Insider Holdings
  5. Cash Flow From Operations
  6. Profit Margin Consistency
  7. Cash And Cash Equivalents
  8. Long Term Debt/Equity Ratio
  9. P/E To Growth Ratio

Other criteria in the Small Cap Growth model include: Inventory to Sales, R&D As A Percentage Of Sales, Accounts Receivable To Sales, Average Shares Outstanding, Sales, Daily Dollar Volume, Price, Income Tax Percentage

The Risk of Momentum

Now, before you go all in on the next momentum strategy you read about, it's important to understand the downside of momentum investing, and there are many.

  • Turnover: Momentum strategies typically have a high degree of turnover, which has multiple implications. For one, high turnover strategies have higher direct and indirect trading costs.
  • Taxes: Because of the high turnover, momentum strategies are very tax inefficient. This is why deploying them in things like an ETF wrapper can make sense.
  • Implementation Risk: Anyone who has followed a model knows that the more touches you have, the more chances of screwing things up. Because of the high amount of turnover, there is more chances of this.
  • Market Transitions: When the market transitions from one leadership group to another, momentum strategies don't turn on a dime, so the strategies often struggle in periods of changing market leadership.
  • Momentum Crashes: If the floor drops out of momentum stocks, watch out. If you go back to the late 90s/early 2000s, all the momentum was in the high flying, overvalued technology stocks and when the air pocket came out, we know what happened.

Rob Arnott and researchers at Research Affiliates published a paper in 2017 that looked at the actual performance of mutual funds that appeared to use momentum as part of their investment approach. Anyone interested in much deeper research on momentum should read this research, but one conclusion they found was clear:

Momentum is a popular and seductive strategy. Human nature conditions us to want more of whatever has given us joy and profit and to get rid of anything that has inflicted pain and losses. Momentum delivers exactly this, as a formal strategy! It tells us to buy what's hot and sell what's not. On paper, this is associated with superior performance, all over the world, over long periods of time. Alas, momentum fares far worse on live assets than on paper. Historically, momentum funds - whether self-identifying as such, or objectively showing a strong momentum loading - have failed to beat the market, on average, even during extended periods when momentum factor paper portfolios were delivering outstanding performance.
Can Momentum Investing Be Saved?, Research Affiliates, OCTOBER 2017

Parting Thoughts on Momentum

Like any investment strategy that attempts to outperform, there are always pluses and minuses. We have certainly seen that with all of the models run on Validea. One of the most important aspects of momentum investing (like any investment strategy) is asking, and trying to understand, the "why" behind it, while also internalizing the reasons it may not work. In today's market, momentum investing has worked very well this year and also has worked over the long-term, but like any strategy, it will go through periods of struggle. The ability to stay the course during them is the key to success.


Portfolio Holdings
Ticker Date Added Return
CACC 5/3/2019 -3.3%
LUKOY 4/5/2019 -10.1%
BMA 4/5/2019 43.4%
MNST 5/3/2019 1.7%
INS 7/26/2019 TBD
LPLA 5/31/2019 8.1%
EME 5/3/2019 1.5%
AAON 7/26/2019 TBD
MA 6/28/2019 5.6%
TEF 7/26/2019 TBD


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

CACC  |   LUKOY  |   BMA  |   MNST  |   INS  |   LPLA  |   EME  |   AAON  |   MA  |   TEF  |  

CREDIT ACCEPTANCE CORP.

Strategy: Patient Investor
Based on: Warren Buffett

Credit Acceptance Corporation offers financing programs that enable automobile dealers to sell vehicles to consumers. The Company's financing programs are offered through a network of automobile dealers. The Company has two Dealers financing programs: the Portfolio Program and the Purchase Program. Under the Portfolio Program, the Company advances money to dealers (Dealer Loan) in exchange for the right to service the underlying consumer loans. Under the Purchase Program, the Company buys the consumer loans from the dealers (Purchased Loan) and keeps the amounts collected from the consumer. Dealer Loans and Purchased Loans are collectively referred to as Loans. As of December 31, 2016, the Company's target market included approximately 60,000 independent and franchised automobile dealers in the United States. The Company has market area managers located throughout the United States that market its programs to dealers, enroll new dealers and support active dealers.

STAGE 1: "Is this a Buffett type company?"

A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage.


LOOK FOR EARNINGS PREDICTABILITY: PASS

Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 4.61, 5.67, 7.07, 8.58, 10.54, 11.92, 14.28, 16.31, 29.14, 29.39. Buffett would consider CACC's earnings predictable. In fact EPS have increased every year. CACC's long term historical EPS growth rate is 25.0%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 15.0% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers.


LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: PASS

Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for CACC, over the last ten years, is 31.9%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 28.7%, 32.7%, 33.6%, 33.3%, 32.2%, 35.0%, 31.3%, 27.6%, 36.6%, 28.0%, and the average ROE over the last 3 years is 30.8%, thus passing this criterion.


LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON ASSETS: PASS

Buffett also requires, for financial companies, that the average Return On Assets (ROA) be at least 1% and consistent. Return On Assets is defined as the net earnings of the business divided by the total assets of the business. The average ROA for CACC, over the last ten years, is 9.9%, which is high enough to pass. It is not enough that the average be at least 1%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROA must be at least 1% for Buffett to feel comfortable that the ROA is consistent. The ROA for the last 10 years, from earliest to latest, is 12.2%, 11.5%, 10.3%, 9.7%, 9.9%, 8.8%, 8.6%, 7.7%, 11.3%, 8.9%, thus passing this criterion.


LOOK AT CAPITAL EXPENDITURES: PASS

Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. CACC's free cash flow per share of $34.75 is positive, indicating that the company is generating more cash than it is consuming. This is a favorable sign, and so the company passes this criterion.


LOOK AT MANAGEMENT'S USE OF RETAINED EARNINGS: PASS

Buffett likes to see if management has spent retained earnings in a way that benefits shareholders. To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $137.51 and compares it to the gain in EPS over the same period of $24.78. CACC's management has proven it can earn shareholders a 18.0% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work.


HAS THE COMPANY BEEN BUYING BACK SHARES: BONUS PASS

Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. CACC's shares outstanding have fallen over the past five years from 20,600,000 to 19,000,000, thus passing this criterion. This is a bonus criterion and will not adversely affect the ability of a stock to pass the strategy as a whole if it is failed.

The preceding concludes Buffett's qualitative analysis. If and when he gets positive responses to all the above criteria, he would then proceed with a price analysis. The price analysis will determine whether or not the stock should be bought. The following is how he would evaluate CACC quantitatively.

STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return.


CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail]

Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $31.86 and divide it by the current market price of $480.90. An investor, purchasing CACC, could expect to receive a 6.63% initial rate of return. Furthermore, he or she could expect the rate to increase 15.0% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing.


COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: PASS

Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 2.00%. Compare this with CACC's initial yield of 6.63%, which will expand at an annual rate of 15.0%, based on the analysts' consensus estimated long term growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding.


CALCULATE THE FUTURE EPS: [No Pass/Fail]

CACC currently has a book value of $109.05. It is safe to say that if CACC can preserve its average rate of return on equity of 30.8% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 30.8% and it will have a book value of $1,592.74 in ten years. If it can still earn 30.8% on equity in ten years, then expected EPS will be $489.82.


CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]

Now take the expected future EPS of $489.82 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (15.1) (5 year average P/E in this case), which is 12.6 and you get CACC's projected future stock price of $6,171.73.


CALCULATE THE EXPECTED RATE OF RETURN BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]

Now add in the total expected dividend pool to be paid over the next ten years, which is $0.00. This gives you a total dollar amount of $6,171.73. These numbers indicate that one could expect to make a 29.1% average annual return on CACC's stock at the present time. Buffett would consider this an absolutely fantastic expected return.


CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail]

If you take the EPS growth of 15.0%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $128.89. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (15.1) (5 year average P/E in this case), which is 12.6. This equals the future stock price of $1,624.03. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $1,624.03.


CALCULATE THE EXPECTED RETURN USING THE AVERAGE EPS GROWTH METHOD: [No Pass/Fail]

Now you can figure out your expected return based on a current price of $480.90 and the future expected stock price, including the dividend pool, of $1,624.03. If you were to invest in CACC at this time, you could expect a 12.94% average annual return on your money. Buffett likes to see a 15% return, but nonetheless would accept this return.


LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: PASS

Based on the two different methods, you could expect an annual compounding rate of return somewhere between 12.9% and 29.1%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 21.0% on CACC stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.


NK LUKOIL PAO (ADR)

Strategy: Contrarian Investor
Based on: David Dreman

NK Lukoil PAO is an energy company. The primary activities of LUKOIL and its subsidiaries are oil exploration, production, refining, marketing and distribution. Its segments include Exploration and Production; Refining, Marketing and Distribution, and Corporate and other. The Exploration and Production segment includes its exploration, development and production operations related to crude oil and gas. These activities are located within Russia, with additional activities in Azerbaijan, Kazakhstan, Uzbekistan, the Middle East, Northern and Western Africa, Norway, Romania and Mexico. The Refining, Marketing and Distribution segment includes refining, petrochemical and transport operations, marketing and trading of crude oil, natural gas and refined products, generation, transportation and sales of electricity, heat and related services. The Corporate and other segment includes operations related to finance activities, production of diamonds and certain other activities.

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. LUKOY has a market cap of $60,441 million, therefore passing the test.


EARNINGS TREND: FAIL

A company should show a rising trend in the reported earnings for the most recent quarters. LUKOY's EPS for the latest quarter is not greater than the prior quarter, (from earliest to most recent quarter) 3.34, 3.33. Hence the stock fails this test, but the investor should evaluate this company qualitatively to see if it qualifies under this methodology's "exception rule".


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. LUKOY passes this test as its EPS growth rate over the past 6 months (-5.12%) has beaten that of the S&P (-8.20%). Unfortunately though, LUKOY's estimated EPS growth figures are unavailable and an opinion cannot be rendered on the second part of the test.


This methodology would utilize four separate criteria to determine if LUKOY 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: PASS

The P/E of a company should be in the bottom 20% of the overall market. LUKOY's P/E of 5.52, based on trailing 12 month earnings, meets the bottom 20% criterion (below 10.63), and therefore passes this test.


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

The P/CF of a company should be in the bottom 20% of the overall market. LUKOY's P/CF of 3.74 meets the bottom 20% criterion (below 5.98) and therefore passes this test.


PRICE/BOOK (P/B) VALUE: PASS

The P/B value of a company should be in the bottom 20% of the overall market. LUKOY's P/B is currently 0.86, which meets the bottom 20% criterion (below 0.94), and it therefore passes 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%). LUKOY's P/D of 20.75 does not meet the bottom 20% criterion (below 18.66), 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: FAIL

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.64] or greater than 2). This is one identifier of financially strong companies, according to this methodology. LUKOY's current ratio of 1.62 fails 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 LUKOY 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: FAIL

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 largest cap stocks, which is 17.57%, and would consider anything over 27% to be staggering. The ROE for LUKOY of 17.27% is not 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. LUKOY's pre-tax profit margin is 10.09%, thus passing this criterion.


YIELD: PASS

The company in question should have a yield that is high and that can be maintained or increased. LUKOY's current yield is 4.82%, while the market yield is 2.62%. LUKOY passes 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 62.52%. LUKOY's Total Debt/Equity of 15.86% is considered acceptable.


BANCO MACRO SA (ADR)

Strategy: Contrarian Investor
Based on: David Dreman

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.

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. BMA has a market cap of $4,471 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. BMA's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.26, 2.65 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. BMA passes this test as its EPS growth rate over the past 6 months (1,294.73%) has beaten that of the S&P (-8.20%). BMA's estimated EPS growth for the current year is (1,234.55%), which indicates the company is expected to experience positive earnings growth. As a result, BMA passes this test.


This methodology would utilize four separate criteria to determine if BMA 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: PASS

The P/E of a company should be in the bottom 20% of the overall market. BMA's P/E of 9.43, based on trailing 12 month earnings, meets the bottom 20% criterion (below 10.63), and therefore passes 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. BMA's P/CF of 9.49 does not meet the bottom 20% criterion (below 5.98), 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. BMA's P/B is currently 3.06, which does not meet the bottom 20% criterion (below 0.94), 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%). BMA's P/D of 29.67 does not meet the bottom 20% criterion (below 18.66), 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.


PAYOUT RATIO: FAIL

A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for BMA is 17.14%, but unfortunately we do not have the historical payout ratio. Hence an opinion cannot be rendered at this time.


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 17.57%, and would consider anything over 27% to be staggering. The ROE for BMA of 34.82% 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. BMA's pre-tax profit margin is 41.46%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. BMA's current yield is 3.37%, while the market yield is 2.62%. BMA fails this test.


MONSTER BEVERAGE CORP

Strategy: Contrarian Investor
Based on: David Dreman

Monster Beverage Corporation develops, markets, sells and distributes energy drink beverages, sodas and/or concentrates for energy drink beverages, primarily under various brand names, including Monster Energy, Monster Rehab, Monster Energy Extra Strength Nitrous Technology, Java Monster, Muscle Monster, Mega Monster Energy, Punch Monster, Juice Monster, Ubermonster, BU, Mutant Super Soda, Nalu, NOS, Burn, Mother, Ultra, Play and Power Play, Gladiator, Relentless, Samurai, BPM and Full Throttle. The Company has three segments: Monster Energy Drinks segment, which consists of its Monster Energy drinks, as well as Mutant Super Soda drinks; Strategic Brands segment, which includes various energy drink brands owned through The Coca-Cola Company (TCCC), and Other segment (Other), which includes the American Fruits & Flavors (AFF) third-party products. The Strategic Brands segment sells concentrates and/or beverage bases to authorized bottling and canning operations.

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. MNST has a market cap of $34,876 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. MNST's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.43, 0.48 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. MNST passes this test as its EPS growth rate over the past 6 months (0.00%) has beaten that of the S&P (-8.20%). MNST's estimated EPS growth for the current year is (18.18%), which indicates the company is expected to experience positive earnings growth. As a result, MNST passes this test.


This methodology would utilize four separate criteria to determine if MNST 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. MNST's P/E of 34.41, based on trailing 12 month earnings, is higher than the bottom 20% criterion (below 10.63), 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. MNST's P/CF of 31.84 does not meet the bottom 20% criterion (below 5.98), 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. MNST's P/B is currently 9.43, which does not meet the bottom 20% criterion (below 0.94), 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%). MNST's P/D is not available, and hence an opinion cannot be rendered at this time.


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 [1.15] or greater than 2). This is one identifier of financially strong companies, according to this methodology. MNST's current ratio of 3.02 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 MNST 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 17.57%, and would consider anything over 27% to be staggering. The ROE for MNST of 27.47% 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. MNST's pre-tax profit margin is 33.97%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. MNST's current yield is not available (or one is not paid) at the present time, while the market yield is 2.62%. Hence, this criterion cannot be evaluated.


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 129.01%. MNST's Total Debt/Equity of 0.02% is considered acceptable.


INTELLIGENT SYSTEMS CORPORATION

Strategy: Small-Cap Growth Investor
Based on: Motley Fool

Intelligent Systems Corporation is engaged in the business of providing technology solutions and processing services to the financial technology and services market. The Company's financial transaction solutions and services (FinTech) operations are conducted through its CoreCard Software, Inc. (CoreCard) subsidiary. CoreCard and its affiliate companies in Romania and India, as well as the corporate office provide administrative, human resources and executive management support. The Company also has two subsidiaries, CoreCard SRL in Romania and ISC Software in India, that perform software development and testing, as well as processing operations support for CoreCard. CoreCard designs, develops, and markets a suite of software solutions to accounts receivable businesses, financial institutions, retailers and processors to manage their credit and debit cards, prepaid cards, private label cards, fleet cards, loyalty programs, and accounts receivable and small loan transactions.


PROFIT MARGIN: PASS

This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. INS's profit margin of 32.26% passes this test.


RELATIVE STRENGTH: PASS

The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. INS, with a relative strength of 99, satisfies this test.


COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: PASS

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for INS (130.00% for EPS, and 71.67% for Sales) are good enough to pass.


INSIDER HOLDINGS: PASS

INS's insiders should own at least 10% (they own 39.74% ) of the company's outstanding shares which is extremely attractive since the minimum requirement is 10%. A high percentage indicates that the insiders are confident that the company will do well.


CASH FLOW FROM OPERATIONS: PASS

A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. INS's free cash flow of $0.65 per share passes this test.


PROFIT MARGIN CONSISTENCY: PASS

INS's profit margin has been consistent or even increasing over the past three years (Current year: 31.04%, Last year: 4.03%, Two years ago: -13.57%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.


R&D AS A PERCENTAGE OF SALES: NEUTRAL

This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in INS's case.


CASH AND CASH EQUIVALENTS: PASS

INS's level of cash $19.3 million passes this criteria. If a company is a cash generator, like INS, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.


ACCOUNT RECEIVABLE TO SALES: PASS

This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for INS was 13.29% last year, while for this year it is 21.44%. Although the AR to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive.


"THE FOOL RATIO" (P/E TO GROWTH): FAIL

The "Fool Ratio" is an extremely important aspect of this analysis. Unfortunately, INS's "Fool Ratio" is not available due to a lack of one or more important figures. Hence, an opinion cannot be given at this time.

The following criteria for INS are less important which means you would place less emphasis on them when making your investment decision using this strategy:

AVERAGE SHARES OUTSTANDING: PASS

INS has not been significantly increasing the number of shares outstanding within recent years which is a good sign. INS currently has 9.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.


SALES: PASS

Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. INS's sales of $23.0 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". INS passes the sales test.


DAILY DOLLAR VOLUME: PASS

INS passes the Daily Dollar Volume (DDV of $8.2 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf."


PRICE: PASS

This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. INS with a price of $46.60 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.


INCOME TAX PERCENTAGE: FAIL

INS's income tax paid for the current year is not available. This could be the cause for some concern according to this strategy. However, because this is not a critical criterion, it should not make or break your investment decision. In order to ensure that you receive a fair analysis we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%).


LPL FINANCIAL HOLDINGS INC

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

LPL Financial Holdings Inc. is a broker-dealer, a custodian for registered investment advisors and an independent consultant to retirement plans. The Company provides a platform of brokerage and investment advisory services to independent financial advisors, including financial advisors at financial institutions across the country. It also supported approximately 4,000 financial advisors, affiliated and licensed with insurance companies through customized clearing services, advisory platforms and technology solutions, as of December 31, 2016. Through its advisors, it is a distributor of financial products and services in the United States. It provides its technology and service to advisors through a technology platform that is server-based and Web-accessible. Its technology offerings are designed to permit its advisors to manage various aspects of their businesses. It automates time-consuming processes, such as account opening and management, document imaging and account rebalancing.


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratio between .75 and 1.5 are good values. LPLA's P/S ratio of 1.36 based on trailing 12 month sales, falls within the "good values" range for non-cyclical companies and is considered attractive.


PRICE/RESEARCH RATIO: PASS

This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. LPLA is neither a Technology nor Medical company. Therefore the Price/Research ratio is not available and, hence, not much emphasis should be placed on this particular variable.


PRELIMINARY GRADE: No Interest in LPLA At this Point

Is LPLA a "Super Stock"? NO


Price/Sales Ratio: FAIL

The Price/Sales ratio is the most important variable according to this methodology. The prospective company should have a low Price/Sales ratio. LPLA's Price/Sales ratio of 1.36 does not pass this criterion.


LONG-TERM EPS GROWTH RATE: PASS

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. LPLA's inflation adjusted EPS growth rate of 28.45% passes this test.


FREE CASH PER SHARE: PASS

This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. LPLA's free cash per share of 3.67 passes this criterion.


THREE YEAR AVERAGE NET PROFIT MARGIN: PASS

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. LPLA's three year net profit margin, which averages 6.26%, passes this criterion.


EMCOR GROUP INC

Strategy: Growth Investor
Based on: Martin Zweig

EMCOR Group, Inc. is an electrical and mechanical construction, and facilities services firm in the United States. The Company provides building services and industrial services. Its segments are United States electrical construction and facilities services; United States mechanical construction and facilities services; United States building services; United States industrial services, and United Kingdom building services. As of December 31, 2016, its services were provided to a range of commercial, industrial, utility and institutional customers through approximately 75 operating subsidiaries and joint venture entities. It is providing construction services relating to electrical and mechanical systems in various types of non-residential and certain residential facilities, and in providing services relating to the operation, maintenance and management of facilities, including refineries and petrochemical plants. It operates various electrical and mechanical systems.


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. EME's P/E is 16.05, based on trailing 12 month earnings, while the current market PE is 11.00. 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. EME's revenue growth is 5.89%, while it's earnings growth rate is 18.81%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, EME 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 (13.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (10.8%) of the current year. Sales growth for the prior must be greater than the latter. For EME 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. EME's EPS ($1.28) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. EME's EPS for this quarter last year ($0.94) 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. EME's growth rate of 36.17% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: PASS

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 EME is 9.40%. This should be less than the growth rates for the 3 previous quarters, which are 27.37%, 25.69%, and 475.00%. EME passes this test, which means that it has 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, 73.68%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 36.17%, (versus the same quarter one year ago) then the stock fails, with one exception: if the growth rate in earnings between the current quarter and the same quarter one year ago is greater than 30%, then the stock would pass. The growth rate over this period for EME is 36.2%, and it would therefore pass this test.


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

The EPS growth rate for the current quarter, 36.17% must be greater than or equal to the historical growth which is 18.81%. EME would therefore pass 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. EME, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.58, 2.72, 3.02, 3.16 and 4.89, 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. EME's long-term growth rate of 18.81%, 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. EME's Debt/Equity (16.51%) is not considered high relative to its industry (53.57%) 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 EME, this criterion has not been met (insider sell transactions are 6, while insiders buying number 41). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.


AAON, INC.

Strategy: Growth Investor
Based on: Martin Zweig

AAON, Inc. is engaged in the engineering, manufacturing, marketing and sale of air conditioning and heating equipment consisting of standard, semi-custom and custom rooftop units, chillers, packaged outdoor mechanical rooms, air handling units, makeup air units, energy recovery units, condensing units, geothermal/water-source heat pumps and coils. Its products serve the commercial and industrial new construction and replacement markets. Its rooftop and condensing unit markets consist of units installed on commercial or industrial structures of less than 10 stories in height. Its air handling units, self-contained units, geothermal/water-source heat pumps, chillers, packaged outdoor mechanical rooms and coils are applicable to all sizes of commercial and industrial buildings. The replacement market consists of products installed to replace existing units/components that are worn or damaged.


P/E RATIO: FAIL

The P/E of a company must be greater than 5 to eliminate weak companies, not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. AAON's P/E is 54.14, based on trailing 12 month earnings, while the current market P/E is 11.00. Therefore, it fails 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. AAON's revenue growth is 5.91%, while it's earnings growth rate is 0.90%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, AAON 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 (14.9%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (7.9%) of the current year. Sales growth for the prior must be greater than the latter. For AAON 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. AAON's EPS ($0.21) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. AAON's EPS for this quarter last year ($0.08) 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. AAON's growth rate of 162.50% 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. AAON 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, -3.95%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 162.50%, (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, 162.50% must be greater than or equal to the historical growth which is 0.90%. AAON 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. AAON, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.80, 0.84, 1.00, 0.94, and 0.81, fails this test.


LONG-TERM EPS GROWTH: FAIL

The final important criterion in this approach is that Earnings Growth be at least 15% per year. AAON's long-term growth rate of 0.90%, based on the average of the 3, 4 and 5 year historical eps growth rates, fails the minimum required.


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. AAON's Debt/Equity (0.00%) is not considered high relative to its industry (86.57%) 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 AAON, this criterion has not been met (insider sell transactions are 5, while insiders buying number 20). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.


MASTERCARD INC

Strategy: Small-Cap Growth Investor
Based on: Motley Fool

MasterCard Incorporated is a technology company that connects consumers, financial institutions, merchants, governments and businesses across the world, enabling them to use electronic forms of payment. The Company operates through Payment Solutions segment. The Company allows user to make payments by creating a range of payment solutions and services using its brands, which include MasterCard, Maestro and Cirrus. The Company provides a range of products and solutions that support payment products, which customers can offer to their cardholders. The Company's services facilitate transactions on its network among cardholders, merchants, financial institutions and governments. The Company's products include consumer credit and charge, commercial, debit, prepaid, commercial and digital. The Company's consumer credit and charge offers a range of programs that enables issuers to provide consumers with cards allowing users to defer payment.


PROFIT MARGIN: PASS

This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. MA's profit margin of 40.33% passes this test.


RELATIVE STRENGTH: FAIL

The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. Although MA's relative strength of 87 is below the acceptable level, yet it is very close. Keep an eye on the stock as it could move into the acceptable range.


COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: FAIL

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for MA (27.66% for EPS, and 8.63% for Sales) are not good enough to pass.


INSIDER HOLDINGS: PASS

MA's insiders should own at least 10% (they own 11.17% ) of the company's outstanding shares which is the minimum required. A high percentage typically indicates that the insiders are confident that the company will do well.


CASH FLOW FROM OPERATIONS: PASS

A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. MA's free cash flow of $4.46 per share passes this test.


PROFIT MARGIN CONSISTENCY: FAIL

The profit margin in the past must be consistently increasing. The profit margin of MA has been inconsistent in the past three years (Current year: 39.19%, Last year: 31.33%, Two years ago: 37.67%), which is unacceptable. This inconsistency will carryover directly to the company's bottom line, or earnings per share.


R&D AS A PERCENTAGE OF SALES: NEUTRAL

This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in MA's case.


CASH AND CASH EQUIVALENTS: PASS

MA's level of cash $8,378.0 million passes this criteria. If a company is a cash generator, like MA, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.


ACCOUNT RECEIVABLE TO SALES: PASS

This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for MA was 26.76% last year, while for this year it is 31.63%. Although the AR to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive.


"THE FOOL RATIO" (P/E TO GROWTH): FAIL

The "Fool Ratio" is an extremely important aspect of this analysis. The methodology says consider shorting shares when the company's Fool Ratio is greater than 1.30. MA's PEG Ratio of 2.83 is excessively high.

The following criteria for MA are less important which means you would place less emphasis on them when making your investment decision using this strategy:

AVERAGE SHARES OUTSTANDING: PASS

MA has not been significantly increasing the number of shares outstanding within recent years which is a good sign. MA currently has 1,032.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.


SALES: FAIL

Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. MA's sales of $15,259.0 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years.


DAILY DOLLAR VOLUME: FAIL

MA does not pass the Daily Dollar Volume (DDV of $980.9 million) test. It exceeds the maximum requirement of $25 million. Stocks that fail the test are too liquid for a small individual investor and many institutions have already discovered it.


PRICE: PASS

This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. MA with a price of $279.35 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.


INCOME TAX PERCENTAGE: FAIL

MA's income tax paid expressed as a percentage of pretax income either this year (19.71%) or last year (26.59%) is below 20% which is cause for concern. Because the tax rate is below 20% this could mean that the earnings that were reported are unrealistically inflated due to the lower level of income tax paid. However, we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%).


TELEFONICA S.A. (ADR)

Strategy: Growth Investor
Based on: Martin Zweig

Telefonica, S.A. is an integrated and diversified telecommunications group operating in Europe and Latin America. The Company's services and products include Mobile business, Fixed-line telephony business and Digital services. Its segments include Telefonica Spain, Telefonica Brazil, Telefonica Germany, Telefonica United Kingdom and Telefonica Hispanoamerica (formed by the Company's operators in Argentina, Chile, Peru, Colombia, Mexico, Venezuela, Ecuador and Uruguay). These segments are engaged in activities relating to wireline, wireless, cable, data, Internet and television (TV) businesses and other digital services in accordance with each location. It offers a range of mobile and related services and products to personal and business customers. It offers traditional fixed telecommunication services, Internet and broadband multimedia services and data and business-solutions services. It offers a range of digital services, such as Internet of Things (IoT).


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. TEF's P/E is 11.51, based on trailing 12 month earnings, while the current market PE is 11.00. 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. TEF's revenue growth is -1.17%, while it's earnings growth rate is 31.14%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, TEF 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 (-1.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-1.9%) of the current year. Sales growth for the prior must be greater than the latter. For TEF 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. TEF's EPS ($0.18) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. TEF's EPS for this quarter last year ($0.14) 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. TEF's growth rate of 28.57% 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. TEF 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, -20.63%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 28.57%, (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, 28.57% must be greater than or equal to the historical growth which is 31.14%. Since this is not the case TEF would therefore fail 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. TEF, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.59, 0.08, 0.47, 0.63, and 0.64, 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. TEF's long-term growth rate of 31.14%, 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. TEF's Debt/Equity (36.68%) is not considered high relative to its industry (128.39%) 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 TEF, this criterion has not been met (insider sell transactions are 0, while insiders buying number 0). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.



Watch List

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

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