The Economy

The US economy remains solid though unspectacular, with good recent news in the housing market being offset by some week industrial data, all while oil and gas prices have been starting to creep higher.

After a big January, industrial production slumped 0.5% in February, according to a new Federal Reserve report. The good news was that manufacturing output rose 0.2%. That wasn't enough to compensate for a 1.4% decrease in mining output and a 4.0% decrease in utility output (a result of unseasonably warm weather that curbed the need for heating fuel), however.

Retail and food service sales dipped 0.1% in February, according to a new report from the Census Bureau. Compared to the year-ago period, they were up an impressive 6.2% year-over-year, however, one of the best annual increases we've seen in quite some time.

Good news came from the housing sector. Housing starts rose 5.2% in February, according to the Census Bureau, and are a stellar 31% above year-ago levels. Single-family home construction, which has been very slow in recent years amid the tepid economic recovery, rose sharply to hit its highest level since before the Great Recession, an excellent sign. Permit issuance for new construction fell 3.1%, but is 8.1% above where it stood a year ago.

New home sales, meanwhile, rebounded a bit from a tough January, rising 2.0% in February, according to the Census Bureau. That put them about 2% below where they were a year ago. The January declines had been driven by a decline of more than 30% in the West region, which rebounded strongly in February, with sales in that part of the country rising more than 38%. February sales were weak in the Northeast and Midwest, however, falling about 24% and about 18%, respectively.

Oil and gas prices have both been climbing higher. Oil has been pushing back toward the $40 per barrel level, while a gallon of regular unleaded on average cost $2.01 on March 24, up from $1.71 a month earlier, according to AAA. That's still about 17% below where it was a year ago.

The oil and gas price increases are too recent to have impacted the latest Consumer Price Index reading -- the CPI was down 0.2% in February. What's interesting to note, however, is that when volatile energy and food prices were stripped out, the "core" CPI was up a pretty strong 0.3% for the second straight month, and the year-over-year gain was 2.3%. With the energy portion of the equation picking up, we may see some of the highest overall inflation numbers in quite some time when March's reading is released next month.

Since our last newsletter, the S&P 500 returned 2.3%, while the Hot List returned -0.5%. So far in 2016, the portfolio has returned 2.0% vs. -0.4% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 187.4% vs. the S&P's 103.5% gain.

Portfolio Update: All Quiet On The Hot List Front

After an excellent start to 2016, the Hot List has taken a breather over the last couple weeks. Since our last newsletter, half of its holdings have been in the black and half have been in the red, with the portfolio overall hanging right around breakeven for much of the fortnight.

Leading the portfolio was HP Inc. (HPQ), which benefited from two bullish analyst reports. It was upgraded to "outperform" from "neutral" by Macquarie, TheStreet.com reported. Then Wells Fargo Securities said it believes the company could benefit from divestitures and is attractively valued. Since our last newsletter, the stock is up 5.7% (performance figures through Thursday trading).

Another solid performer was Thor Industries Inc. (THO), which announced that it purchased a 128,000-square-foot production facility in Bristol, Indiana to increase its Motor Coach manufacturing capacity. Production at the new facility is expected to begin in the fourth quarter of fiscal 2016. Its shares are up about 3.6% since our last newsletter.

On the negative side, shares of Waddell & Reed (WDR) slid 6.2%. There didn't appear to be any major news around the stock, so this may have simply been case of a smaller stock (market capitalization of about $2 billion) having some meaningless short-term fluctuations. The stock still gets high scores from several of my models, including a 100% score from my Peter Lynch-based approach.

All of the portfolio's other holdings gained or lost less than 3% since our last newsletter -- the sort of minor short-term movements that are to be expected. In two weeks, we will rebalance the portfolio, keeping stocks that are still rated highly and replacing those that have been surpassed. Until then, stay disciplined.

Recommended Reading

One of the more interesting articles I came across over the past couple weeks came from Barron's Andrew Bary and involved something I've talked about quite a bit lately -- the lengthy period of underperformance we've seen from value stocks. Bary reports on market developments that appear to signal a shift favoring value investing after growth's nearly decade-long stretch of dominance. "The market's leadership has begun to change," writes Bary, "as growth stocks have grown too rich for investors' liking, and value stocks too cheap to ignore." Dubravko Lakos-Bujas of JP Morgan tells him that "momentum stocks trade at an extreme premium to value stocks, with valuation spread the highest since 1980, except for during the tech bubble." The article examines a number of interesting factors, including what type of conditions might be needed for value stocks to continue their recent turnaround, and whether the current era of central bank intervention has an impact on value-focused approaches.

Guru Spotlight: Joseph Piotroski-Strategy Roaring Back

Since World War II, the biggest threat confronting investors likely hasn't been war or financial scandal or politicians' ineptitude. No, in all likelihood it has been inflation.

Inflation is, as contrarian guru David Dreman has said, "a virus" that eats away at the returns of the vast majority of assets, and since the end of World War II it has been a permanent feature of the US economy. In only the three years (1949, 1955, and 2009) since the end of the war has annual inflation been negative, and in all three of those years deflation was no greater than 1.2%, according to USInflationCalculator.com. Over this 70-year span, annual inflation has averaged 3.6%, and it has been at least 5% in nearly one-quarter of those years, reaching as high as 13.5% in 1980.

That average inflation rate of 3.6% might not seem like a huge deal. But over the long term, it is just that. A $10,000 investment that compounds at a rate of 10% per year for 20 years ends up worth about $67,000. The same investment at 6.4% (minus the 3.6% for inflation)? About half that -- $34,600.

Of course, in recent years, inflation has been tepid, at best. But as I noted above, some recent data suggests that it is starting to pick up. So how do you protect against inflation?

Well, to answer that question, let me tell you a story involving a most unlikely duo of investment gurus -- one whom just about everyone knows, and one whom just about no one knows. (If that's not enough to pique your interest, consider this: The story also involves an inflation-beating investment strategy that is up 22% so far this year.) Back in May of 1977 -- just months before the U.S. would see consecutive annual inflation rates of 9.0%, 13.3%, 12.5%, and 8.9% -- Warren Buffett wrote a column for Fortune entitled "How Inflation Swindles the Equity Investor". The thrust of Buffett's piece was that inflation isn't good for any asset class, though he said stocks were probably the best bet in an inflationary period. What really caught my attention, however, were a few of the specific points Buffett made.

While stock returns can vary greatly from year to year, Buffett noted that return on equity for U.S. corporations as a group have been remarkably stable, at around 12%. In a sense, he said, that 12% is like the coupon rate you get on a bond. If you buy the stock market when it is selling at a "normal" level compared to book value, you can expect a long-term return of 12% per year going forward (before inflation and taxes). Buy the market below normal price/book values, and it's like buying a bond below par value -- your returns should be greater than that 12%; buy the market when it's selling at elevated price/book levels, however, and it's like buying a bond above par. Your returns likely won't be as great as that 12% figure over the long haul.

Since stock returns tend to be linked to ROE over the long haul, Buffett made another key observation: For a company to benefit from an inflationary period, he said, it would have to increase its ROE, and that could be done only in one of five main ways:

-- increasing turnover (the ratio between sales and total assets employed in the business);
--cheaper leverage;
--more leverage ( though he says more debt "should be viewed with skepticism by shareholders. A 12 percent return from an enterprise that is debt-free is far superior to the same return achieved by a business hocked to its eyeballs.")
--lower income taxes;
--wider operating margins on sales


Buffett went on to say that he didn't think most companies, or the corporate world as a whole, could do those things with any degree of regularity during an inflationary period.

But most companies doesn't mean all companies. And that brings us to the second guru in this anti-inflation story. Some of Buffett's main ROE conclusions are also part of the method Joseph Piotroski developed some two-plus decades later to identify winning stocks. The Piotroski method may thus offer some hints about individual stocks that have shown an ability to do the types of things Buffett said were necessary to thrive during inflationary times.

Piotroski, whose writings form the basis for one of my Guru Strategies, is a little-known college accounting professor who back in 2000 wrote a research paper showing how using simple accounting-based stock-selection methods could produce excellent returns over the long haul. His back-tested results doubled the S&P 500 over a two-decade period.

Buffett noted that buying stocks with low price/book ratios is like buying a bond below par, and low price/book ratios is where Piotroski's method starts. (Actually, it starts with high book/market ratios, which is essentially the same thing.) Piotroski targeted stocks with book/market ratios in the top 20% of the market -- the type of stocks that Buffett might say were selling "below par".

The Piotroski-based criteria that line up with Buffett's inflation-beating criteria: Asset turnover should be greater in the most recent year than it was a year earlier; gross margin should also be higher; and the long-term debt/assets ratio should be lower. Among the other qualities he looked for: increasing returns on assets and current ratios, and a positive cash flow from operations.

So far in 2016, the Piotroski-based model has been on fire. A 10-stock portfolio picked using the strategy is up more than 22%, while the S&P 500 is about flat. Two of its holdings -- Atwood Oceanics and Noble Corporation, both of which reside in the oil and gas arena -- are up more than 40% since joining the portfolio in mid-January and mid- February, respectively.

But before you get too excited, you should know that the Piotroski approach has been significantly more volatile than any of my other Guru Strategies over the long term -- and it has also been the worst performer over the long term. Since its early 2004 inception, the 10-stock portfolio is in the red (down 0.2% annualized) while the S&P 500 is up 4.9% annualized. After an exceptional 2010 in which it gained more than 55%, it fell on hard times. It has lagged the S&P in each of the last five years, culminating with a terrible 37.8% loss last year. The strategy has no doubt been hurt by the struggles of value stocks in recent years, but eventually (if not already) the growth/value pendulum will swing back to the value side. That's why I remain optimistic on the strategy going forward, and the 2016 performance is certainly a good sign.

It's also worth noting that in his study, Piotroski used one-year rebalancing periods, while the Piotroski-based portfolio I'm referring to uses monthly rebalancing periods, like the Hot List. An annually rebalanced, 20-stock version of this portfolio that I track is actually beating the S&P 500 since inception, having gained 6.9% annualized vs. that 4.9% S&P figure. (Interestingly, the 20-stock, annually rebalanced portfolio is actually in the red this year, down 5.5%.)

The lesson: Given how volatile the stocks the strategy picks can be, it's probably best to use the annual rebalancing and a portfolio of at least 20 stocks if you use the Piotroski-based strategy. Here's a look at the 20 stocks in the annually rebalanced version of the portfolio today:

Screen Shot 2016-03-24 at 11.01.38 PM



News about Validea Hot List Stocks

REX American Resources (REX): REX reported net income for Q4 of $3.7 million ($0.54 per share), down from $20.3 million ($2.55 per share) a year earlier. For fiscal 2015, REX reported net income attributable to REX shareholders of $31.4 million, compared with $87.3 million in fiscal 2014, while diluted net income per share attributable to REX common shareholders was $4.30 in fiscal 2015, compared to $10.76 per share in fiscal 2014. Net sales and revenue for the twelve months ended January 31, 2016 were $436.5 million, compared to $572.2 million in fiscal 2014. Company officials said 2015 was a difficult year for ethanol producers, but that they were pleased with the company's performance in the face of those headwinds.



The Next Issue

In two weeks, we will publish another issue of the Hot List, at which time we will rebalance the portfolio. If you have any questions, please feel free to contact us at hotlist@validea.com.

Portfolio Holdings
Ticker Date Added Return
CALM 11/20/2015 -11.7%
VLO 3/11/2016 0.7%
THO 2/12/2016 24.2%
WD 3/11/2016 -4.8%
USNA 3/11/2016 -3.9%
WDR 3/11/2016 -11.2%
BMA 11/20/2015 -3.0%
HPQ 3/11/2016 3.2%
REX 3/11/2016 -4.6%
ASPS 1/15/2016 -12.5%


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

CALM   |   VLO   |   THO   |   WD   |   USNA   |   WDR   |   BMA   |   HPQ   |   REX   |   ASPS   |  

CAL-MAINE FOODS INC

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

Cal-Maine Foods, Inc. is a producer and marketer of shell eggs in the United States. The Company's primary business is the production, grading, packaging, marketing and distribution of shell eggs. The Company sells its shell eggs in the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States. The Company markets its shell eggs through its distribution network to a group of customers, including national and regional grocery store chains, club stores, foodservice distributors and egg product consumers. Some of its sales are completed through co-pack agreements. It has a total flock of approximately 33.7 million layers and 8.4 million pullets and breeders. The Company markets its specialty shell eggs under brands, such as Egg-Land's Best, Land O' Lakes, Farmhouse and 4-Grain. The Company also produces, markets and distributes private label specialty shell eggs to several customers.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (6.95) relative to the growth rate (22.27%), 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 CALM (0.31) 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. CALM, whose sales are $1,996.4 million, needs to have a P/E below 40 to pass this criterion. CALM's P/E of (6.95) is considered acceptable.


INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for CALM was 10.14% last year, while for this year it is 9.28%. Since inventory to sales has decreased from last year by -0.86%, CALM passes this test.


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 CALM is 22.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for CALM (3.30%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.


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 CALM (2.63%) 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 CALM (9.81%) 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.


VALERO ENERGY CORPORATION

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

Valero Energy Corp (Valero) is an international manufacturer and marketer of transportation fuels, other petrochemical products and power. The Company's refineries can produce conventional gasolines, premium gasolines, gasoline, diesel fuel, low-sulfur diesel fuel, ultra-low-sulfur diesel fuel, CARB diesel fuel, other distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products. The Company markets branded and unbranded refined products through approximately 7,400 outlets. The Company also owns 11 ethanol plants in the central plains region of the United States that primarily produce ethanol. The Company operates through two segments. The refining segment includes refining operations, wholesale marketing, product supply and distribution, and transportation operations in the United States, Canada, the United Kingdom, Aruba and Ireland. Its ethanol segment primarily includes sale of internally produced ethanol and distillers grains.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (8.33) relative to the growth rate (23.73%), 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 VLO (0.35) 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. VLO, whose sales are $87,804.0 million, needs to have a P/E below 40 to pass this criterion. VLO's P/E of (8.33) is considered acceptable.


INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for VLO was 5.06% last year, while for this year it is 6.72%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (1.66%) is below 5%.


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 VLO is 23.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for VLO (35.94%) to be normal (equity is approximately twice debt).


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 VLO (9.55%) 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 VLO (-9.88%) 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.


THOR INDUSTRIES, INC.

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

Thor Industries, Inc. (Thor), manufactures and sells various recreational vehicles (RV) throughout the United States and Canada, as well as related parts and accessories. The principal types of The Company's towable recreational vehicles that the Company produces include conventional travel trailers and fifth wheels. In addition, it also produces truck and folding campers and equestrian, and other specialty towable recreational vehicles, as well as Class A, Class C and Class B motorhomes. The Company operates through two segments: towable recreational vehicles and motorized recreational vehicles. The Company through its operating subsidiaries manufactures recreational vehicles in North America. The subsidiaries are Airstream, Inc., CrossRoads RV, Thor Motor Coach, Inc., Keystone RV Company, Heartland Recreational Vehicles, LLC, Livin' Lite RV, Inc., Bison Coach, K.Z., Inc. and Postle Operating, LLC.


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 $3,234 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 1.66, 2.07, 2.86, 3.29 and 3.79, 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 0.76, based on trailing 12 month sales, passes this criterion.


RELATIVE STRENGTH: FAIL

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 has a relative strength of 65. This does not pass the final criterion. As a result, this methodology would not consider the stock even though it passed the previous three criteria.


WALKER & DUNLOP, INC.

Strategy: Growth Investor
Based on: Martin Zweig

Walker & Dunlop, Inc. (Walker & Dunlop) is a holding company, which conducts all of its operations through Walker & Dunlop, LLC, its operating company. Walker & Dunlop is a provider of commercial real estate financial services in the United States, with a primary focus on multifamily lending. The Company originates, sells, and services a range of multifamily and other commercial real estate financing products, including Multifamily Finance, Federal Housing Administration Finance, Capital Markets, and Proprietary Capital. It originates and sells loans through the programs of the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac, and together with Fannie Mae, the government-sponsored enterprises), the Government National Mortgage Association (Ginnie Mae) and the Federal Housing Administration, a division of the United States Department of Housing and Urban Development (together with Ginnie Mae, HUD).


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. WD's P/E is 8.82, based on trailing 12 month earnings, while the current market PE is 15.00. 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. WD's revenue growth is 28.41%, while it's earnings growth rate is 25.52%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, WD passes this criterion.


SALES GROWTH RATE: FAIL

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 (7.8%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (23.2%) of the current year. Sales growth for the prior must be greater than the latter. For WD this criterion has not been met and fails this test.


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. WD's EPS ($0.67) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. WD's EPS for this quarter last year ($0.50) 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. WD's growth rate of 34.00% 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 WD is 12.76%. This should be less than the growth rates for the 3 previous quarters, which are 214.29%, 67.50%, and 40.43%. WD 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, 84.26%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 34.00%, (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 WD is 34.0%, 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, 34.00% must be greater than or equal to the historical growth which is 25.52%. WD 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. WD, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.60, 1.31, 1.21, 1.58, and 2.65, 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. WD's long-term growth rate of 25.52%, based on the average of the 3, 4 and 5 year historical eps growth rates, 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 WD, this criterion has not been met (insider sell transactions are 131, while insiders buying number 33). 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.


USANA HEALTH SCIENCES, INC.

Strategy: Growth Investor
Based on: Martin Zweig

USANA Health Sciences, Inc. develops and manufactures science-based nutritional and personal care products. The Company has operations in approximately 19 markets across the world, where it distributes and sells its products by way of direct selling. The Company operates as a direct selling company and reports revenue in two geographic regions: Americas and Europe, and Asia Pacific, which includes three sub-regions as: Southeast Asia Pacific, Greater China and North Asia. Americas and Europe includes the United States, Canada, Mexico, Colombia, the United Kingdom, France, Belgium, and the Netherlands. Southeast Asia Pacific includes Australia, New Zealand, Singapore, Malaysia, the Philippines, and Thailand; Greater China includes Hong Kong, Taiwan and China, and North Asia includes Japan and South Korea.


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. USNA's P/E is 15.81, based on trailing 12 month earnings, while the current market PE is 15.00. 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. USNA's revenue growth is 12.13%, while it's earnings growth rate is 28.08%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, USNA fails this criterion.


SALES GROWTH RATE: FAIL

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 (2.1%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (21.5%) of the current year. Sales growth for the prior must be greater than the latter. For USNA this criterion has not been met and fails this test.


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. USNA's EPS ($1.83) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. USNA's EPS for this quarter last year ($1.66) 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. USNA's growth rate of 10.24% 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 USNA is 14.04%. This should be less than the growth rates for the 3 previous quarters, which are 30.43%, 42.22%, and 30.61%. USNA 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: FAIL

If the growth rate of the prior three quarter's earnings, 34.51%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 10.24%, (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 USNA is 10.2%, and it would therefore fail this test.


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

The EPS growth rate for the current quarter, 10.24% must be greater than or equal to the historical growth which is 28.08%. Since this is not the case USNA 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. USNA, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.54, 4.45, 5.56, 5.60 and 7.18, 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. USNA's long-term growth rate of 28.08%, 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. USNA's Debt/Equity (0.00%) is not considered high relative to its industry (195.95%) 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 USNA, this criterion has not been met (insider sell transactions are 241, while insiders buying number 164). 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.


WADDELL & REED FINANCIAL, INC.

Strategy: Value Investor
Based on: Benjamin Graham

Waddell & Reed Financial, Inc. is a mutual fund and asset management company. The Company provides investment management, investment advisory, investment product underwriting and distribution and shareholder services administration to Waddell & Reed Advisors group of mutual funds, Ivy Funds, Ivy Funds Variable Insurance Portfolios, InvestEd Portfolios, 529 college savings and Selector Management Fund SICAV and its Ivy Global Investors sub-funds and institutional and separately managed accounts. The Company operates its business through a distribution network. Its retail products are distributed through its Wholesale channel, which includes third parties, such as other broker/dealers, registered investment advisors and various retirement platforms or through its Advisors channel sales force of independent financial advisors. It also markets investment advisory services to institutional investors, either directly or through consultants, in its Institutional channel.


SECTOR: FAIL

WDR is in the Financial sector, which is one sector that this methodology avoids. Technology and financial stocks were considered too risky to invest in when this methodology was published. Although times have changed since then with respect to the risk of financial stocks, several of Graham's criteria, like the Current Ratio and Debt to Current Assets, do not apply to financial companies. As a result, the company will not be able to pass this methodology, although we will include the remainder of the analysis for informational purposes.


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. WDR's sales of $1,516.6 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. WDR's current ratio of 2.75 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 WDR is $190.0 million, while the net current assets are $774.5 million. WDR 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 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. WDR's EPS growth over that period of 248.2% 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. WDR's P/E of 7.81 (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. WDR's Price/Book ratio is 2.25, while the P/E is 7.81. WDR passes the Price/Book test.


BANCO MACRO SA (ADR)

Strategy: Patient Investor
Based on: Warren Buffett

Banco Macro S.A. (the Bank) is a bank. The Bank offers traditional bank products and services to companies, including those operating in regional economies, as well as to individuals. The Bank offers savings and checking accounts, credit and debit cards, consumer finance loans (including personal loans), mortgage loans, automobile loans, overdrafts, credit-related services, home and car insurance coverage, tax collection, utility payments, automatic teller machines (ATMs) and money transfers. The Bank offers Plan Sueldo payroll services, lending, corporate credit cards, mortgage finance, transaction processing and foreign exchange. The Bank offers transaction services to its corporate customers, such as cash management, customer collections, payments to suppliers, payroll administration, foreign exchange transactions, foreign trade services, corporate credit cards and information services, such as its Datanet and Interpymes services.

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 0.04, 0.04, 0.06, 0.11, 0.10, 0.14, 0.18, 0.28, 0.40, 0.58. Buffett would consider BMA's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 6 years ago. The dips have totaled 9.1%. BMA's long term historical EPS growth rate is 27.8%, based on the 10 year average EPS growth rate.


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 BMA, over the last ten years, is 23.8%, 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 15.5%, 14.0%, 22.6%, 28.9%, 20.2%, 24.3%, 24.3%, 27.8%, 29.7%, 31.0%, and the average ROE over the last 3 years is 29.5%, 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 BMA, over the last ten years, is 3.3%, 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 2.5%, 1.9%, 2.9%, 3.6%, 2.5%, 2.8%, 3.1%, 4.0%, 4.6%, 4.7%, 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. BMA's free cash flow per share of $4.92 is positive, indicating that the company is generating more cash that 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 $1.58 and compares it to the gain in EPS over the same period of $0.54. BMA's management has proven it can earn shareholders a 34.3% 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. BMA's shares outstanding have fallen over the past five years from 573,250,000 to 58,000,000, 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 BMA 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 $5.96 and divide it by the current market price of $65.99. An investor, purchasing BMA, could expect to receive a 9.03% initial rate of return. Furthermore, he or she could expect the rate to increase 27.8% per year, based on the 10 year average EPS 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 2.25%. Compare this with BMA's initial yield of 9.03%, which will expand at an annual rate of 27.8%, based on the 10 year average EPS 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]

BMA currently has a book value of $18.75. It is safe to say that if BMA can preserve its average rate of return on equity of 23.8% and continues to retain 69.66% of its earnings, it will be able to sustain an earnings growth rate of 16.6% and it will have a book value of $87.07 in ten years. If it can still earn 23.8% on equity in ten years, then expected EPS will be $20.75.


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

Now take the expected future EPS of $20.75 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (11.1) (5 year average P/E in this case), which is 6.3 and you get BMA's projected future stock price of $129.88.


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 $88.17. This gives you a total dollar amount of $218.05. These numbers indicate that one could expect to make a 12.7% average annual return on BMA's stock at the present time. Although, the return is slightly below the liking of Buffett, the return would still be somewhat acceptable.


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

If you take the EPS growth of 27.8%, based on the 10 year average EPS growth rate, you can project EPS in ten years to be $69.14. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (11.1) (5 year average P/E in this case), which is 6.3. This equals the future stock price of $432.79. Add in the total expected dividend pool of $88.17 to get a total dollar amount of $520.96.


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 $65.99 and the future expected stock price, including the dividend pool, of $520.96. If you were to invest in BMA at this time, you could expect a 22.95% average annual return on your money. Buffett would consider this an exceptional 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 12.7% and 23.0%. 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 17.8% on BMA stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.


HP INC

Strategy: Contrarian Investor
Based on: David Dreman

HP Inc., formerly Hewlett-Packard Company, is a provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses and large enterprises. The Company operates in seven business segments: Personal Systems, Printing, the Enterprise Group, Enterprise Services, Software, HP Financial Services and Corporate Investments. It offers personal computing and other access devices; imaging and printing related products and services; enterprise information technology (IT) infrastructure, including enterprise server and storage technology, networking products and solutions, technology support and maintenance; multi-vendor customer services, including technology consulting, outsourcing and support services across infrastructure, applications and business process domains, and software products and solution, including application testing and delivery software, big data analytics, information governance and IT Operations Management.

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. HPQ has a market cap of $20,841 million, therefore passing the test.


EARNINGS TREND: FAIL

A company should show a rising trend in the reported earnings for the most recent quarters. HPQ's EPS for the latest quarter is not greater than the prior quarter, (from earliest to most recent quarter) 0.83, 0.36. 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: FAIL

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. HPQ fails this test as its EPS growth rate for the past 6 months (-23.40%) does not beat that of the S&P (-4.23%).


This methodology would utilize four separate criteria to determine if HPQ 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. HPQ's P/E of 5.45, based on trailing 12 month earnings, meets the bottom 20% criterion (below 11.39), 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. HPQ's P/CF of 2.92 meets the bottom 20% criterion (below 6.37) 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. HPQ's P/B is currently 0.78, which meets the bottom 20% criterion (below 0.87), 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%). HPQ's P/D of 24.33 does not meet the bottom 20% criterion (below 18.02), 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 [2.52] or greater than 2). This is one identifier of financially strong companies, according to this methodology. HPQ's current ratio of 0.90 fails the test.


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 HPQ is 33.55%, while its historical payout ratio has been 16.60%. Therefore, it fails the payout criterion.


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 16.45%, and would consider anything over 27% to be staggering. The ROE for HPQ of 37.32% is high enough to pass this criterion.


PRE-TAX PROFIT MARGINS: FAIL

This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. HPQ's pre-tax profit margin is 5.22%, thus failing this criterion.


YIELD: PASS

The company in question should have a yield that is high and that can be maintained or increased. HPQ's current yield is 4.11%, while the market yield is 2.78%. HPQ 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 37.71%. HPQ's Total Debt/Equity of 24.24% is considered acceptable.


REX AMERICAN RESOURCES CORP

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

Rex American Resources Corporation (REX) is a holding company to succeed to the entire ownership of three affiliated companies, Rex Radio and Television, Inc., Stereo Town, Inc. and Kelly & Cohen Appliances, Inc. As of January 31, 2015, the Company invested in four ethanol production entities, two of which the Company has a majority ownership interest. The Company's ethanol investments include One Earth Energy, LLC, NuGen Energy, LLC, Patriot Holdings, LLC, Big River Resources W Burlington, LLC, Big River Resources Galva, LLC, Big River United Energy, LLC and Big River Resources Boyceville, LLC. The Company owns around 74% of the outstanding membership units of One Earth Energy, LLC, around 99% of NuGen Energy, LLC, around 27% of Patriot Holdings, LLC and around 10% of Big River Resources, LLC.


DETERMINE THE CLASSIFICATION:

REX is considered a "Stalwart", according to this methodology, for its earnings growth of 13.81%. This is based on based on the average of the 4 and 5 year historical eps growth rates, which lies within a moderate 10%-19% range. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. However, REX is not considered a "True Stalwart" for its sales of $436 million are less than the multi-billion dollar level.


INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for REX was 3.16% last year, while for this year it is 3.94%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (0.78%) is below 5%.


YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: PASS

The Yield-adjusted P/E/G ratio for REX (0.91), based on the average of the 4 and 5 year historical eps growth rates, is O.K.


EARNINGS PER SHARE: PASS

The EPS for a stalwart company must be positive. REX's EPS ($4.27) would satisfy this criterion.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for REX (0.00%) to be wonderfully low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.


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 REX (6.31%) 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: BONUS PASS

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 REX (36.22%) is high enough to add to the attractiveness of this company.


ALTISOURCE PORTFOLIO SOLUTIONS S.A.

Strategy: Growth Investor
Based on: Martin Zweig

Altisource Portfolio Solutions S.A. is a provider of marketplace and transaction solutions for the real estate, mortgage and consumer debt industries offering both distribution and content. The Company operates in three segments: Mortgage Services, Financial Services and Technology Services. The Company's Mortgage Services segment provides services that span the mortgage and real estate lifecycle, and are outsourced by loan servicers, loan originators, investors and other sellers of single family homes. The Financial Services segment provides collection and customer relationship management services to debt originators and servicers, and the utility, insurance and hotel industries. The Company's Technology Services consists of REALSuite of software applications, Equator, LLC (Equator) software applications, Mortgage Builder software applications and its information technology (IT) infrastructure management services.


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. ASPS's P/E is 12.77, based on trailing 12 month earnings, while the current market PE is 15.00. 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. ASPS's revenue growth is 25.47%, while it's earnings growth rate is -6.71%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, ASPS 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 (5.5%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-5.2%) of the current year. Sales growth for the prior must be greater than the latter. For ASPS 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: FAIL

The first of these criteria is that the current EPS be positive. ASPS's EPS ($-2.35) fail this test.


QUARTERLY EARNINGS ONE YEAR AGO: FAIL

The EPS for the quarter one year ago must be positive. ASPS's EPS for this quarter last year ($-0.08) fail 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. ASPS's growth rate of 2,837.50% 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. ASPS had 3 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, -25.18%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 2,837.50%, (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, 2,837.50% must be greater than or equal to the historical growth which is -6.71%. ASPS 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. ASPS, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.77, 4.43, 5.19, 5.69, and 2.02, 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. ASPS's long-term growth rate of -6.71%, based on the average of the 3, 4 and 5 year historical eps growth rates, fails the minimum required.


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 ASPS, this criterion has not been met (insider sell transactions are 14, 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.



Watch List

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

Ticker Company Name Current
Score
BANC BANC OF CALIFORNIA INC 73%
SIMO SILICON MOTION TECHNOLOGY CORP. (ADR) 67%
SAFM SANDERSON FARMS, INC. 60%
NSR NEUSTAR INC 58%
LUV SOUTHWEST AIRLINES CO 57%
JBSS JOHN B. SANFILIPPO & SON, INC. 57%
SWHC SMITH & WESSON HOLDING CORP 56%
ANIK ANIKA THERAPEUTICS INC 53%
SKX SKECHERS USA INC 53%
WLK WESTLAKE CHEMICAL CORPORATION 53%



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