The Economy

A pretty rosy March jobs report, along with encouraging signs out of China, have heartened investors and pushed US stocks higher over the past couple weeks.

The jobs report impressed both on the jobs-added and wage growth fronts. The economy added 215,000 jobs during March, the Labor Department said. People continued to return to the workforce -- the number of people not in the labor force declined by more than 200,000 in March. In part because of that, the unemployment rate inched higher by a 10th of a percentage point, to 5.0%. The "U-6" rate, which unlike the headline number takes into account those working part-time who want full-time work, and discouraged workers who have given up looking for a job, increased by the same amount, to 9.8%.

The unemployment report also provided good news regarding wages. Average hourly wages rose at an annual pace of about 3.3%. They are now about 2.3% above their year-ago level.

As it has for some time, job growth continues to be driven by the service sector. According to the Labor Department, 199,000 of the jobs added in March came from the service sector. It expanded in March for the 74th straight month, according to the Institute for Supply Management, doing so at a slightly faster pace than it did in February. New order growth was very strong, and employment conditions improved, according to ISM.

While the Labor Department said the economy actually lost a net of 4,000 manufacturing jobs in March, ISM's manufacturing index indicated that the sector expanded for the first time in six months. A surge in new orders and raw materials prices -- the latter of which increased for the first time in nearly a year-and-a-half -- were behind the expansion. The manufacturing index reading was well above the level that indicates an expansion of the overall economy, the 82nd straight month it has been above that mark. The reading corresponded to a 2.7% increase in real annualized gross domestic product.

Gas prices have continued to move higher since our last newsletter. As of April 7, a gallon of regular unleaded on average cost $2.04, up from $1.81 a month earlier. That's still 14% below where it was one year ago.

Outside the US, China's stimulus efforts appear to be helping the Asian superpower. Private company purchasing managers' indices for both manufacturing and services jumped in March. The manufacturing index hit its highest level in more than a year, according to Financial Times. The Chinese government's manufacturing PMI, which mainly covers state-owned companies, reached a nine-month high, meanwhile, and the government's service sector reading was also positive. A pickup in property purchases seems to be the big driver behind China's improving results. Stimulus programs directed at the property market have been a big part of the Chinese government's efforts to cushion its slowdown in growth.

Europe continues to struggle. German industrial orders slid 1.2% in February, The Guardian reported, falling well short of the expected 0.2% increase. It was the biggest decline in six months. Markit's latest report on Europe's PMI said that "the eurozone economy failed to show any significant gain in momentum in March. With the PMI barely rising from February's 13-month low, the region looks to have grown by just 0.3% again in the first quarter." The group cited "lacklustre demand, accompanied by falling prices as firms compete at the expense of profit margins" as reasons for the weak growth.

Since our last newsletter, the S&P 500 returned 0.3%, while the Hot List returned -1.6%. So far in 2016, the portfolio has returned 0.4% vs. -0.1% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 182.8% vs. the S&P's 104.1% gain.

Want Excitement? Stick to Hoops

If you were lucky enough to watch this past Monday's men's national championship basketball game to its conclusion, boy, were you in for a treat. A fairly close game turned wild in the last minute, with North Carolina capping off a furious comeback with an improbable, double-clutching, 30-foot three-point shot. Then, with less than 5 seconds left, Villanova went the length of the floor and buried a buzzer-beater that was also from well beyond the three-point line. It was wild, thrilling, and full of surprises -- exactly what a great basketball game should be.

Of course, that's exactly what a great investment strategy is not. That's easy to forget, especially when you read about hedge fund stars buying mansions in the Hamptons and watch movies like Wall Street and The Wolf of Wall Street. When most people think of investment gurus, they probably think of smooth-talking alpha males clad in $10,000 suits driving sports cars that cost more than a nice house. To be sure, extremely successful investors often by some flashy toys -- Martin Zweig, one of the gurus I base my strategies on, once owned New York City's most expensive apartment, as well as the gun from Dirty Harry, the motorcycle from Easy Rider, and Michael Jordan's jersey from his rookie season with the Chicago Bulls. But the approaches they use to make their money and the stocks on which they build their fortunes are far more often than not anything but flashy. "If investing is entertaining, if you're having fun, you're probably not making any money," billionaire hedge fund manager George Soros once said. "Good investing is boring."

The data indicates he's right. In What Works On Wall Street, quantitative investment guru James O'Shaughnessy, another of the investing greats upon whose writings I base my models, examined how various stock market sectors performed from 1968 through 2009. The best performer? Not the flashy technology sector -- it placed dead last with average annual returns of 7.3% and more volatility than any other sector. No, the winner was the boring old consumer staples sector. Consumer staples averaged compound annual returns of 13.57%, beating the next-best sector (financials) by 1.2 percentage points per year. And, the sector had the second-lowest standard deviation out of the market's 10 sectors; the only one that was less volatile was utilities.

That might seem surprising, but it shouldn't. History's greatest investors have usually favored good, solid companies over high-risk/high-reward plays. Benjamin Graham -- known as both the "Father of Value Investing" and Warren Buffett's mentor -- wrote that true "investment" deals with the future "more as a hazard to be guarded against than as a source of profit through prophecy." John Neff -- who was so respected by top investment managers that many of them parked their own money with him -- said his fund was "relatively prosaic, dull, conservative." Joseph Piotroski is an accounting professor whose highly successful strategy is grounded in basic accounting principles. Warren Buffett? His core holdings include staples like Coca-Cola and big, boring financials like American Express and Wells Fargo. And explanations about how he picks stocks are anything but exciting tales. Buffett has often talked about how much time he spends reading thick, dry annual reports. And in a PBS interview several years back, Peter Buffett, the youngest of Buffett's three children, said his father has been so successful "because he is clear and unemotional, dispassionate about his relationship to those numbers on the page and the information he's taking in." Unemotional and dispassionate about the numbers on the page -- that hardly makes for the type of wheeling, dealing stock trader Hollywood has put in our minds.

What Buffett, Neff, Graham, Piotroski, and other highly successful investors have all realized is that good investing involves discipline, long-term thinking, and patience. That's why we have created a system that incorporates all of those aspects. We buy stocks based on the cold, hard numbers on their balance sheets and income statements, not eye-catching headlines or our own personal emotions. We sell only on regularly scheduled rebalancing dates so that we never make emotional sell decisions. We use strategies that are tried and true, not flavor of the month approaches that might seem wonderful on the surface but which are untested. This system is dull and mechanical -- and that's just the way we like it. To invest in a more exciting way would likely mean we were either focusing on short-term profits or taking on too much risk, and history has proven that those are great ways to lose a lot of money.

That doesn't mean we won't from time to time purchase stocks in more exciting parts of the market. We certainly have had a number of tech stocks show up in the Hot List over the years. But they are almost never not the sort of flashy, exciting tech stocks everyone's talking about, because those are usually far too pricey to pass muster with our models. This week, for example, we are adding Western Digital Corporation to the portfolio. At one time, Western was the type of stock that generated buzz at cocktail parties or the water cooler. But today, it is far from that. It's an "old tech" firm, and investors don't like "old." They much prefer shiny and new. Because of that, the hard drive maker is cheap -- dirt cheap. It trades for just 9 times earnings, 0.8 times sales, and 1.1 times book value. Sure, it's not going to product gangbusters growth, but it has been hanging in there as it adapts to a changing landscape -- and it pays a 4.5% dividend. Sexy? No. A bargain? Yes.

Investing isn't about predicting what stocks are going to go up tomorrow or next week or next month. It's about figuring out what something is worth, and paying less for it. To do that, you need to look at balance sheets and fundamentals and income statements. It's decidedly unexciting work, but it produces results. That's why we leave the excitement to March Madness and embrace the boring beauty of unemotional, disciplined investing.


The Fallen

As we rebalance the Validea Hot List, 3 stocks leave our portfolio. These include: Altisource Portfolio Solutions S.a. (ASPS), Rex American Resources Corp (REX) and Usana Health Sciences, Inc. (USNA).

The Keepers

7 stocks remain in the portfolio. They are: Thor Industries, Inc. (THO), Valero Energy Corporation (VLO), Cal-maine Foods Inc (CALM), Waddell & Reed Financial, Inc. (WDR), Banco Macro Sa (Adr) (BMA), Walker & Dunlop, Inc. (WD) and Hp Inc (HPQ).

The New Additions

We are adding 3 stocks to the portfolio. These include: Western Digital Corp (WDC), Foot Locker, Inc. (FL) and Fossil Group Inc (FOSL).

Latest Changes

Additions  
WESTERN DIGITAL CORP WDC
FOOT LOCKER, INC. FL
FOSSIL GROUP INC FOSL
Deletions  
ALTISOURCE PORTFOLIO SOLUTIONS S.A. ASPS
REX AMERICAN RESOURCES CORP REX
USANA HEALTH SCIENCES, INC. USNA


Newcomers to the Validea Hot List

Fossil Group (FOSL): Texas-based Fossil makes a variety of watches, handbags, clothing, and other accessories. The $2-billion-market-cap firm has taken in $3 billion in sales over the past 12 months. It's been beaten down amid disappointing earnings projections, but my Benjamin Graham- and Joel Greenblatt-based models think it has been hit too hard. Both have strong interest in the stock. To read more about Fossil's fundamentals, scroll down to the "Detailed Stock Analysis" section below.

Foot Locker (FL): This specialty athletic retailer operates nearly 3,500 stores in North America, Europe, Australia, and New Zealand, offering athletic footwear and apparel.

Foot Locker ($8.6 billion market cap) gets strong interest from my Peter Lynch- and James O'Shaughnessy-based models. To read more about its fundamentals, check out the "Detailed Stock Analysis" section below.

Western Digital Corp. (WDC): From late-1991 to mid-1997, this hard drive and digital storage firm's shares increased 40-fold as the computer industry boomed. Now it's more of a big "steady Eddie," with a $10 billion market capitalization and more than $13 billion in annual sales.

WDC gets strong interest from my Peter Lynch-based model and high marks from my Benjamin Graham-based model. For details about its fundamentals, see the "Detailed Stock Analysis" section.



News about Validea Hot List Stocks

HP Inc. (HPQ): HP unveiled its new ultra-slim laptop -- the HP Spectre -- at a luxury conference in France this week, CNBC reported. The laptop is as thin as a AAA battery, and limited editions come encrusted with diamonds and 18-karat gold. The unit is expected to compete with Apple's ultra-thin MacBook Air as HP tries to reverse some recent trends: From 2014 to 2015, Apple's computer shipments rose 6.2%, while HP's dropped 5.9%, according to CNBC.



The Next Issue

In two weeks, we will publish another issue of the Hot List, at which time we will take an in-depth look at my investment strategies. If you have any questions, please feel free to contact us at hotlist@validea.com.

Portfolio Holdings
Ticker Date Added Return
BMA 11/20/2015 -14.6%
HPQ 3/11/2016 2.5%
FL 4/8/2016 TBD
CALM 11/20/2015 -8.3%
WDR 3/11/2016 -17.1%
VLO 3/11/2016 -5.7%
THO 2/12/2016 22.6%
WD 3/11/2016 -9.0%
WDC 4/8/2016 TBD
FOSL 4/8/2016 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

BMA   |   HPQ   |   FL   |   CALM   |   WDR   |   VLO   |   THO   |   WD   |   WDC   |   FOSL   |  

BANCO MACRO SA (ADR)

Strategy: Growth Investor
Based on: Martin Zweig

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.


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. BMA's P/E is 9.73, 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. BMA's revenue growth is 42.07%, while it's earnings growth rate is 43.98%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, BMA 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 (40.9%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (79%) of the current year. Sales growth for the prior must be greater than the latter. For BMA 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. BMA's EPS ($2.33) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. BMA's EPS for this quarter last year ($0.13) 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. BMA's growth rate of 1,692.31% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: FAIL

Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for BMA is 21.99%. This should be less than the growth rates for the 3 previous quarters which are 25.00%, 18.18% and 228.57%. BMA does not pass this test, which means that it does not have good, reasonably steady earnings.


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


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

If the growth rate of the prior three quarter's earnings, 76.92%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 1,692.31%, (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, 1,692.31% must be greater than or equal to the historical growth which is 43.98%. BMA 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. BMA, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.14, 0.18, 0.28, 0.40 and 0.58, 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. BMA's long-term growth rate of 43.98%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.

HP INC

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

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.


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. HPQ's P/S of 0.28 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors.


TOTAL DEBT/EQUITY RATIO: PASS

Less debt equals less risk according to this methodology. HPQ's Debt/Equity of 24.24% is acceptable, thus passing the test.


PRICE/RESEARCH RATIO: PASS

This methodology considers Technology and Medical companies with low Price/Research ratios to be attractive. This ratio indicates how much a market values a company's Research and Development (R&D). Companies with Price/Research ratios between 5 and 10 are bargains and considered attractive.HPQ's Price/Research ratio of 5.91 is considered favorable.


PRELIMINARY GRADE: Some Interest in HPQ At this Point

Is HPQ a "Super Stock"? NO


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.HPQ's P/S ratio of 0.28 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors.


LONG-TERM EPS GROWTH RATE: FAIL

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. HPQ's inflation adjusted EPS growth rate of -8.14% fails the 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. HPQ's free cash per share of 0.89 passes this criterion.


THREE YEAR AVERAGE NET PROFIT MARGIN: FAIL

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. HPQ, whose three year net profit margin averages 4.49%, fails this evaluation.

FOOT LOCKER, INC.

Strategy: Value Investor
Based on: Benjamin Graham

Foot Locker, Inc. is a retailer of shoes and apparel. The Company operates in two segments: Athletic Stores and Direct-to-Customers. The Athletic Stores segment is an athletic footwear and apparel retailer whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction and SIX:02, as well as the retail stores of Runners Point Group, including Runners Point and Sidestep. The Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and the direct-to-customer subsidiary of Runners Point Group, which sell to customers through their Internet and mobile sites and catalogs. As of January 31, 2015, the Company operated 3,423 primarily mall-based stores in the United States, Canada, Europe, Australia and New Zealand. As of January 31, 2015, the Company operated a total of 78 franchised stores, of which 31 are in the Middle East, 27 in Germany and Switzerland, and 20 in the Republic of Korea.


SECTOR: PASS

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


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. FL's sales of $7,412.0 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. FL's current ratio of 3.72 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 FL is $129.0 million, while the net current assets are $1,906.0 million. FL 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. FL's EPS growth over that period of 190.4% passes the EPS growth test.


P/E RATIO: FAIL

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. FL's P/E of 16.24 (using the current PE) fails this test.


PRICE/BOOK RATIO: FAIL

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. FL's Price/Book ratio is 3.35, while the P/E is 16.24. FL fails the Price/Book test.

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 (6.96) 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 $2,008.6 million, needs to have a P/E below 40 to pass this criterion. CALM's P/E of (6.96) 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 (2.98%) 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 (2.54%) 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 (9.50%) 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.

WADDELL & REED FINANCIAL, INC.

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

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.


DETERMINE THE CLASSIFICATION:

According to this methodology, WDR is a "Slow Grower", based on its single digit earnings growth of 9.88%, based on the average of the 3, 4 and 5 year historical eps growth rates.


SALES: PASS

WDR would fall into the "Dividend Payers" category according to this methodology. The first requirement of a Slow Grower is that its sales exceed one billion. WDR's sales are $1,517 million. It passes the test.


YIELD COMPARED TO THE S&P 500: PASS

This methodology also maintains that the Yield of a "Slow Grower" should be high, which includes being higher than the S&P average (currently 2.44%), and at least 3%. This yield is required because dividends are the main reason for investing in "Slow Growers". The yield for WDR is 8.59% so it passes this test.


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

This methodology would consider the Yield-adjusted P/E/G ratio for WDR of 0.39, based on the average of the 3, 4 and 5 year historical eps growth rates, to be excellent.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

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


EQUITY/ASSETS RATIO: PASS

This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. WDR's Equity/Assets ratio (54.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion.


RETURN ON ASSETS: PASS

This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. WDR's ROA (16.01%) is above the minimum 1% that this methodology looks for, thus passing the criterion.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for WDR (3.36%) 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 WDR (37.12%) is high enough to add to the attractiveness of this company.

VALERO ENERGY CORPORATION

Strategy: Value Investor
Based on: Benjamin Graham

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.


SECTOR: PASS

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


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. VLO's sales of $87,804.0 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. VLO's current ratio of 2.03 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 VLO is $7,250.0 million, while the net current assets are $7,612.0 million. VLO passes this test.


LONG-TERM EPS GROWTH: FAIL

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for VLO were negative within the last 5 years and therefore the company fails this criterion.


P/E RATIO: PASS

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. VLO's P/E of 9.30 (using the 3 year 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. VLO's Price/Book ratio is 1.42, while the P/E is 9.30. VLO passes the Price/Book test.

THOR INDUSTRIES, INC.

Strategy: Growth Investor
Based on: Martin Zweig

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.


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. THO's P/E is 14.06, 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. THO's revenue growth is 13.71%, while it's earnings growth rate is 19.29%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, THO 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 (14.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (11.8%) of the current year. Sales growth for the prior must be greater than the latter. For THO 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. THO's EPS ($0.86) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. THO's EPS for this quarter last year ($0.57) 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. THO's growth rate of 50.88% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: FAIL

Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for THO is 9.65%. This should be less than the growth rates for the 3 previous quarters which are 15.53%, 4.80% and 32.88%. THO does not pass this test, which means that it does not have good, reasonably steady earnings.


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


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

If the growth rate of the prior three quarter's earnings, 15.28%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 50.88%, (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, 50.88% must be greater than or equal to the historical growth which is 19.29%. THO 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. THO, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.66, 2.07, 2.86, 3.29 and 3.79, 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. THO's long-term growth rate of 19.29%, 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. THO's Debt/Equity (0.00%) is not considered high relative to its industry (7.14%) 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 THO, this criterion has not been met (insider sell transactions are 174, while insiders buying number 21). 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.

WALKER & DUNLOP, INC.

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

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).


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. WD's profit margin of 17.64% 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 WD'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 WD (34.00% for EPS, and 7.78% for Sales) are not good enough to pass.


INSIDER HOLDINGS: PASS

WD's insiders should own at least 10% (they own 10.22% ) 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: FAIL

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. WD's free cash flow of $-43.33 per share fails this test.


PROFIT MARGIN CONSISTENCY: PASS

WD's profit margin has been consistent or even increasing over the past three years (Current year: 17.54%, Last year: 14.25%, Two years ago: 13.02%), 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 WD's case.


CASH AND CASH EQUIVALENTS: PASS

WD's level of cash $137.0 million passes this criteria. If a company is a cash generator, like WD, 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 WD was 6.44% last year, while for this year it is 5.09%. Since the AR to sales is decreasing by -1.35% the stock passes this criterion.


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

The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (WD's is 0.33), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. WD passes this test.

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

AVERAGE SHARES OUTSTANDING: PASS

WD has not been significantly increasing the number of shares outstanding within recent years which is a good sign. WD currently has 31.0 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. WD's sales of $468.2 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". WD passes the sales test.


DAILY DOLLAR VOLUME: PASS

WD passes the Daily Dollar Volume (DDV of $5.3 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. WD with a price of $22.35 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: PASS

WD's income tax paid expressed as a percentage of pretax income this year was (38.98%) and last year (38.72%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.

WESTERN DIGITAL CORP

Strategy: Value Investor
Based on: Benjamin Graham

Western Digital Corporation, is a data storage solutions company. The Company is a developer, manufacturer and provider of data storage solutions that enable consumers, businesses, governments and other organizations to create, manage, experience and preserve digital content. The Company's Technology product includes: Hard Disk Drives and Solid-State Drives. Hard Disk Drives, provide non-volatile data storage. Solid-State Drives, are semiconductor and non-volatile media. The Company offers solutions including: Enterprise Storage Solutions, Client Desktop and Notebook PCs, Branded Product Solutions, Consumer Electronics Solutions. The Company's products are marketed under the HGST, WD and G-Technology brand names.


SECTOR: FAIL

WDC is in the Technology 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. At that time they were not the driving force of the market as they are today. Although this methodology would avoid WDC, we will provide the rest of the analysis, as we feel times have changed.


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. WDC's sales of $13,418.0 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. WDC's current ratio of 2.76 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 WDC is $2,062.0 million, while the net current assets are $5,703.0 million. WDC 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. WDC's EPS growth over that period of 226.4% 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. WDC's P/E of 8.92 (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. WDC's Price/Book ratio is 1.05, while the P/E is 8.92. WDC passes the Price/Book test.

FOSSIL GROUP INC

Strategy: Value Investor
Based on: Benjamin Graham

Fossil Group, Inc. is a global designer, marketer and distributor company that specializes in consumer fashion accessories. The Company's offerings include a line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, soft accessories, and select apparel. The Company operates in four different segments: the North America Wholesale segment, the Europe Wholesale segment, Asia Pacific Wholesale segment and the Direct to Consumer segment. Its products are distributed globally through various distribution channels, including wholesale, retail stores and commercial Websites. The Company sells its products through a diversified distribution network that includes department stores, specialty retail locations, specialty watch and jewelry stores, Company-owned retail and factory outlet stores, mass market stores, and through its FOSSIL Website.


SECTOR: PASS

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


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. FOSL's sales of $3,228.8 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: PASS

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. FOSL's current ratio of 2.95 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 FOSL is $785.1 million, while the net current assets are $953.1 million. FOSL 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. FOSL's EPS growth over that period of 363.5% 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. FOSL's P/E of 8.67 (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. FOSL's Price/Book ratio is 2.05, while the P/E is 8.67. FOSL passes the Price/Book test.


Watch List

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

Ticker Company Name Current
Score
OME OMEGA PROTEIN CORPORATION 72%
SIMO SILICON MOTION TECHNOLOGY CORP. (ADR) 59%
JBSS JOHN B. SANFILIPPO & SON, INC. 57%
SSL SASOL LIMITED (ADR) 56%
TECD TECH DATA CORP 55%
WLK WESTLAKE CHEMICAL CORPORATION 55%
AFSI AMTRUST FINANCIAL SERVICES INC 53%
BANC BANC OF CALIFORNIA INC 52%
HRL HORMEL FOODS CORP 51%
SKX SKECHERS USA INC 51%



Disclaimer

The names of individuals (i.e., the 'gurus') appearing in this report are for identification purposes of his methodology only, as derived by Validea.com from published sources, and are not intended to suggest or imply any affiliation with or endorsement or even agreement with this report personally by such gurus, or any knowledge or approval by such persons of the content of this report. All trademarks, service marks and tradenames appearing in this report are the property of their respective owners, and are likewise used for identification purposes only.

Validea is not registered as a securities broker-dealer or investment advisor either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. Validea is not responsible for trades executed by users of this site based on the information included herein. The information presented on this website does not represent a recommendation to buy or sell stocks or any financial instrument nor is it intended as an endorsement of any security or investment. The information on this website is generic by nature and is not personalized to the specific situation of any individual. The user therefore bears complete responsibility for their own investment research and should seek the advice of a qualified investment professional prior to making any investment decisions.

Performance results are based on model portfolios and do not reflect actual trading. Actual performance will vary based on a variety of factors, including market conditions and trading costs. Past performance is not necessarily indicative of future results. Individual stocks mentioned throughout this web site may be holdings in the managed portfolios of Validea Capital Management, a separate asset management firm founded by Validea.com founder John Reese. Validea Capital Management, which is a separate legal entity and an SEC registered investment advisory firm, uses, in part, the strategies on the web site to select stocks for its clients.