The Economy

While investors have been spooked by whispers of a credit crisis and continued fears about interest rate hikes, the US economy -- and the economy of one of its key trading partners -- have offered several positive signs over the past two weeks.

The labor market followed up its stellar October with a strong November, for example, with the economy adding 211,000 jobs, the Labor Department said. In addition, the September and October jobs-added figures were revised higher by a total of 35,000. Average hourly wages grew at a modest annual pace of 1.9% vs. October, though average weekly wages fell slightly as average hours worked dipped just a bit. Amid all this, the unemployment rate remained at 5.0%, the lowest it has been since April 2008. 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, inched up a tenth of a percentage point in November to 9.9%.

Retail sales, meanwhile, rose by 0.2% in November, according to a new report from the Census Bureau. That put sales about 1.5% higher than they were a year ago -- not a particularly good year-over-year increase, but gains are gains.

Housing starts continued a topsy-turvy few months, bouncing back from a weak October with a strong November in which starts increased 10.5%, according to the Census Bureau. They are now 18.5% above where they were a year ago. Permit issuance for new construction also surged, rising 11%, and is nearly 25% above where it stood a year ago.

Of course, the biggest headlines from the last two weeks have been generated by the Federal Reserve decision to at long last raise interest rates. While the issue has often dominated financial news, it is important to keep in mind that the initial hike is very minor, and the Fed seemed to stress that any subsequent rate hikes will be very gradual.

One of the reasons the Fed held off for so long on increasing rates is that inflation has been so low in recent years. And while the Fed is moving ahead, inflation remains tame -- non-existent, actually. The Consumer Price Index was flat in November, according to the Labor Department, meaning it is ahead of its year-ago level by just 0.5%. Stripping out volatile food and energy prices, so-called "core" inflation, which was up 0.2% in November, is 2.0% ahead of its year-ago pace. The gap between the core number and the overall number should start to decrease as we move into 2016, as the year-ago comparisons get further from the epicenter of the late-2014 commodity collapse.

That doesn't mean commodities, and oil and gas prices in particular, have bottomed. Gas prices keep on falling and have been on the verge of dipping below the $2 mark for the first time since 2009. As of December 14, a gallon of regular unleaded on average cost $2.01, down from $2.18 a month earlier. That's about 21% below where it was one year ago.

Overseas, good news came out of China. Factory output grew at a 6.2% pace in November, according to Chinese government data, significantly ahead of the 5.6% that analysts expected and the 5.6% from the previous month. It was the strongest pace in five months. Retail sales, meanwhile, grew at 11.2%, the strongest pace of the year, topping estimates of 11.0%. Fixed-asset investment also exceeded expectations, according to Reuters. The Chinese government has implemented a number of stimulus measures in recent months, and the November data shows that they appear to be working.

Then there's Third Avenue. The firm said last week that it was barring investors from redeeming money from its Focused Credit Fund, a high-yield offering. Third Avenue said that it didn't have enough cash to meet redemption demand, according to The Wall Street Journal, and that it would hurt fund investors if it were to sell illiquid holdings at what it says are unreasonably low prices. The move got many investors thinking that a credit crisis may be looming, and there has indeed been a lot of turmoil in high yield areas of the credit market. A big reason for that is likely the Fed; interest rate increases tend to hurt high-yield fixed income assets. Whether a full blown credit crisis is in the offing remains to be seen, but the notion is certainly one to keep in mind going forward. From the commodity price collapse to the incredible top-heaviness of the market to the years and years of ultra-low interest rates we have had, a number of unusual factors are influencing the market and economy. I wouldn't rule anything out going forward.

Amid all this, the S&P 500 has returned -0.4% since our last newsletter, while the Hot List has returned -4.2%. So far in 2015, the portfolio has returned -12.3% vs. -0.8% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 183.8% vs. the S&P's 104.1% gain.

Believing In Value

It has been a rough stretch for the broader market and, to a greater degree, the Hot List. Several of the portfolio's holdings have stumbled over the past few weeks, most notably Banco Macro, which is down about 20% since joining the portfolio a month ago, and Cal-Maine Foods, which is down about 17% over that span (through Dec. 15). Neither of these firms has had any significant deterioration in its fundamentals that would merit such a decline. In the case of Banco Macro, the US interest rate increase (and the preceding expectation of an increase), as well as Argentina's tumultuous political situation, may well have played a role. But in times of broader market turbulence, it can be particularly hard to pinpoint exactly what is driving a stock's day-to-day machinations.

With less than two weeks left in the year, the Hot List's recent struggles mean that the portfolio will almost assuredly lag the S&P 500 in 2015. That would mark the first time in its twelve-year history that the portfolio has underperformed the index in consecutive years.

While we are of course disappointed with the past two years' performance, we are not alarmed; all strategies, even those used by history's best investors, go through losing periods, and sometimes those periods can last two or even three years. We do think it's important to understand the reasons behind the underperformance, however, and in this case there seem to be a couple main factors.

First, while history has shown that smaller stocks tend to beat their larger peers by a significant margin over the long haul, we've seen a divergence from that trend over the past couple years. As of Dec. 11, US large-cap stocks were slightly in the black in 2015, posting average gains of 0.2%, according to Morningstar.com. US small-cap stocks, meanwhile, were down nearly 6% for the year.

Part of that wide spread may be due to the normal ebb and flow that occurs between different market segments. But we think that a big part of it may be the result of something else: the rise of index funds. Index-tracking funds have become so popular in recent years, and the majority of them are weighted by market capitalization. This creates a cycle in which investors load up on index funds, pushing prices of the market's biggest stocks higher, which in turn makes those stocks comprise an even greater portion of the index, which means investors are buying more of those stocks when they buy index funds, and on and on.

The results of that is a very top-heavy market, and the data bears that out: Through October, the 10 largest stocks (by market capitalization) in the S&P 500 were up 13.9%. The other 490? They were down 5.8%. That spread of nearly 20 percentage points has been higher only twice -- in 1998 and 1999, the height of the Internet bubble. The tremendous outperformance of large-cap stocks was not sustainable back then, of course, and we doubt that it is sustainable right now. As of December 15, five of the 10 largest US stocks traded at price/earnings ratios of 36 or higher; three of them at P/E ratios of 98 or higher. It will be nearly impossible for multi-hundred-billion-dollar companies like these to produce the sort of growth that would sustain those lofty valuations. And it's not just that handful of the largest stocks that look pricey; mega-capitalization stocks have been more expensive than small stocks only 4% of the time over the past 10 years, according to our data.

Which brings me to the second major reason for our underperformance: the struggles of value stocks. Over many, many decades, value investing has proven to be a winning strategy. That doesn't mean it always works, however, and 2015 has been one of those years. Through Dec. 11, US growth stocks were up 4.5% year-to-date; US value stocks, meanwhile, were down 4.4%, according to Morningstar. When you combine the underperformance of small stocks with the underperformance of value stocks, the results are much worse: US small value stocks are down close to 10% this year. On the opposite end of the spectrum, large US growth stocks are up nearly 7%. That gap of nearly 17% is completely antithetical to the long-term historical averages; according to the data of noted financial researcher Kenneth French, from 1927 through 2014, small value stocks outperformed large growth stocks by an average of 5.1 percentage points annually.

But the underperformance of value goes beyond 2015. Since February 2007, US value stocks have lagged the most expensive US stocks by 2.6 percentage points annually, according to Barron's. The eight-year, seven-month stretch of underperformance is the longest losing streak on record, going back to 1926.

So, are value stocks dead? We find that notion very unlikely. That's because we don't think the historical outperformance of value stocks is due to circumstance or coincidence. Value stocks have outperformed because of human nature and the very nature of business itself.

We humans are an emotional bunch, and we have a tendency to overreact to events. We also have an innate desire to follow the crowd, and a great ability (and need) to recognize patterns. Thousands of years ago, those instincts helped us avoid danger, find food, and survive. When our ancestors saw a group of people sprinting out of the jungle with looks of terror on their faces, those who had the instinct to follow the crowd increased their chances of survival, for example. Similarly, if every time it rained, a river overflowed into the surrounding area, those who recognized the pattern and avoided that area when it started to rain increased their chances of survival. These characteristics thus were passed down to us in our DNA.

The problem is that, in investing, those same instincts and abilities work against us. We see danger in stocks that have short-term problems and are falling. We see a pattern in a declining stock price, and instinctively think the pattern will go on forever. The danger and the apparent pattern cause us to sell, and run as fast as we can away from the stock -- likely into a far more popular, and pricey, stock. Investors do this even when the first stock is already trading levels well below what its underlying business fundamentals would suggest, and even when the second stock is trading well above what its underlying business fundamentals would suggest. That's how we get value stocks, on one hand, and growth (or, more accurately, "glamour") stocks, on the other.

That's what happens in the short term. But at some point, fundamentals of business and investing dictate that a company must justify its glamorous valuation. And it's incredibly hard to produce the sort of earnings growth that justifies an earnings multiple of 40 or 50, let alone 100 or more, over the long-term. That's why glamour stocks tend to eventually tumble. Value stocks, on the other hand, have such low expectations that even minor improvements can lead to major increases in share price.

So, what is more likely: that, after decades upon decades upon decades, human nature and the nature of business have changed and the valuation of something that you buy has forever ceased to be relevant; or, that something else has been happening to temporarily distort the natural way of things?

Obviously, we believe it to be the latter. It is likely that several factors have combined to create this extended stretch of underperformance by value stocks. First, as I've discussed several times before, many investors are still feeling the trauma of the 2008-09 financial crisis. The events of that jarring period have caused many to become extra sensitive to any sign of danger in the market. This risk aversion has likely led many investors to avoid -- more than usual -- value plays, which tend to have short-term problems hanging over them. Instead, they are following the crowd into glamour stocks that everyone seems to love.

Second, in recent years, US growth has been so-so, Europe has been in great turmoil, and growth in China and other emerging markets has slowed. With growth hard to come by, it is likely that investors are reaching for growth wherever they can find it -- even if it is in overpriced glamour stocks.

Thirdly, the basic materials and energy sectors tend to be laden with value stocks -- these unglamorous firms don't often demand particularly high valuations. Both of these sectors have been pummeled by the commodity collapse of the past year and a half, meaning that value stocks have taken the brunt of the commodity blow. The short-term pounding isn't a result of value investing failing; it is not as though investors suddenly found low valuations to be undesirable. Instead, it is a case of businesses being revalued in light of dramatic changes in commodity supply.

Finally, don't underestimate the role of the Federal Reserve in all this. When you tinker with markets, there are repercussions, and one of the repercussions of the Fed's extended period of ultra-low rates may well be a distortion of the growth/value cycle. Growth stocks are valued on future earnings -- when rates are on the rise, investors are less willing to pay high multiples. Value stocks, meanwhile, are the bird in hand, with strong existing cash flows. Given the recent underperformance of value stocks and strategies and the rate-hiking cycle that is about to begin, one would expect value to start to demonstrate better performance -- increasing rates are, in fact, typically good for value stocks.

The Gurus and Discipline

Above, I said that even the best strategies and strategists goes through losing periods. At times like these, it is important to remember that that's not just lip service. The gurus upon whom I base my strategies are some of history's most successful investors. But each of the 10 strategists about whom I wrote in The Guru Investor had multiyear stretches in which they significantly lagged the broader market.

What all of these gurus knew, however, was that ditching a proven, fundamentally sound strategy after a couple years of poor performance only compounds your trouble. Mean reversion is a powerful force, and good strategies rebound -- very often, the worse the underperformance, the bigger the rebound. Give up on a solid strategy after a bad year or two, and you are likely to miss the rebound. You end up with the pain of the bad year or two, and the pain of missing out when the worm turns.

The gurus didn't bail. They knew that value and fundamentals win over the long haul, so they stuck to their guns. Here are three examples of gurus who roared back from rough periods, along with an accompanying quote from each guru about the importance of sticking with a solid, fundamental-focused strategy:

Warren Buffett

The Rough Patch: While the S&P 500 lost 26.4% in 1974, Buffett was down 43.7%. The following year, when the S&P bounced back with a 37.2% gain, Buffett remained in the red, losing 5%.

The Rebound: In 1976, the S&P continued higher, gaining 23.6%. Buffett blew that away, posting gains of 134.2%. The following year, when the S&P lost 7.4%, Buffett gained another 55.1%. The rebound didn't end there. In 1978 and 1979, the S&P gained 6.4% and 18.2%, respectively. Buffett? He posted gains of 10.1% and 110.5%.

The Quote: "Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can't produce a baby in one month by getting nine women pregnant."

John Neff

The Rough Patch: In 1971 in 1972, the S&P 500 gained 14.6% and 18.9%, respectively, as the "Nifty Fifty" -- a group of popular large-caps -- grew to bloated valuations. Neff's Windsor fund wasn't keen on the overvalued giants, and gained just 7.5% and 10.2%, however. Then in 1973, when the S&P fell 14.7%, Windsor was hit much harder, tumbling 25%.

The Rebound: After that three-year stretch of underperformance, Windsor beat the S&P by 9.6 percentage points, 18.3 percentage points, 22.8 percentage points, 8.4 percentage points, and 2.4 percentage points over the next five years.

The Quote: "I watched in amazement as investors clamored for Nifty Fifty stocks at the expense of dozens, if not hundreds, of sturdy growth stocks of lesser renown. My report to shareholders in November 1973 reflected the dismal course of events and, even more forcefully, my resilient faith in Windsor's low P/E strategy: '[We] view the current devastation in the marketplace, not as a reason for alarm, but rather as one of opportunity,' [I wrote]." -- from John Neff on Investing

Peter Lynch

The Rough Patch: In 1981, the S&P lost 5%, but Lynch's fund tumbled 22.6%. The next year, the S&P surged 21.4%, but Lynch lost 1.3%.

The Rebound: Lynch followed up those two years with his best year ever, posting a whopping 82.8% gain in 1983.

The Quote: "When people say, 'Look, in two months it's up 20%, so I really picked a winner,' or 'Terrible, in two months it's down 20%, so I really picked a loser,' they're confusing prices with prospects. Unless they are short-term traders who are looking for 20% gains, the short-term fanfare means absolutely nothing. A stock's going up or down after you buy it only tells you that there was somebody who was willing to pay more -- or less -- for the identical merchandise." -- from One Up On Wall Street

The Power of Mean Reversion

Having faith in their fundamental-focused approaches during times when fundamentals were being overlooked was a key to these gurus' long-term successes. They knew that, sooner or later, the market would come back to fundamentals and value, and that their results would revert to their very successful means.

We have seen a similar mean-reversion with our Guru Strategies. We recently tested how these approaches have performed following one-year stretches of underperformance. We calculated results on a rolling, daily basis (i.e., we looked at subsequent performance starting on any day that followed a 365-day period of underperformance), meaning that our study covers about 2,500 one-year periods.

The results showed that some of our most heavily weighted strategies have demonstrated tremendous mean-reversion. For example, following one-year periods in which it has lagged the S&P 500, the Motley Fool-based portfolio has, on average, gone on to outperform the index by 17.2 percentage points over the next year. The Joel Greenblatt-based portfolio has outperformed by an average of 9.4 percentage points in similar circumstances, while the Benjamin Graham-based portfolio has outperformed by 7.2 percentage points.

The exceptional performance of these and other models that drive the Hot List, along with the performances and advice of the gurus who inspired them, have me very optimistic as we look ahead to 2016. I'm not saying things will turn around immediately. But what I am saying is that history has shown that investing always comes back to fundamentals and value. That means that, over the long term, fundamental-focused, value-centric strategies like ours are the best way to invest. To give up on these approaches after a couple down years would be shortsighted.

The hardest part about investing is staying disciplined through periods of underperformance. But, as the gurus have demonstrated, if you can do so, you should reap the rewards down the line. We believe that the rewards are coming, and we will continue to be patient and disciplined so that we do not miss out on them.


The Fallen

As we rebalance the Validea Hot List, 3 stocks leave our portfolio. These include: Trueblue Inc (TBI), Silicon Motion Technology Corp. (Adr) (SIMO) and Apple Inc. (AAPL).

The Keepers

7 stocks remain in the portfolio. They are: Valero Energy Corporation (VLO), Polaris Industries Inc. (PII), Sanderson Farms, Inc. (SAFM), Tesoro Corporation (TSO), Cal-maine Foods Inc (CALM), Syntel, Inc. (SYNT) and Banco Macro Sa (Adr) (BMA).

The New Additions

We are adding 3 stocks to the portfolio. These include: Thor Industries, Inc. (THO), National-oilwell Varco, Inc. (NOV) and Eplus Inc. (PLUS).

Latest Changes

Additions  
THOR INDUSTRIES, INC. THO
NATIONAL-OILWELL VARCO, INC. NOV
EPLUS INC. PLUS
Deletions  
TRUEBLUE INC TBI
SILICON MOTION TECHNOLOGY CORP. (ADR) SIMO
APPLE INC. AAPL


Newcomers to the Validea Hot List

Thor Industries, Inc. (THO): Thor ($3 billion market cap) manufactures and sells a wide variety of recreational vehicles throughout the US and Canada, including the Airstream line of campers and trailers. They include conventional travel trailers, fifth wheels and park models. In addition, it also produces truck and folding campers and equestrian and other specialty towable vehicles.

Thor gets strong interest from my Peter Lynch- and James O'Shaughnessy-based models. To read more about its fundamentals, scroll down to the "Detailed Stock Analysis" section below.

ePlus Inc. (PLUS): Virginia-based ePlus helps organizations optimize their IT infrastructure and supply chain processes by delivering complex information technology solutions, which include managed and professional services and products from top manufacturers, flexible financing, and proprietary software. The 24-year-old firm serves commercial, state, municipal, and education customers nationally.

ePlus ($750 million market cap) gets strong interest from my James O'Shaughnessy- and Peter Lynch-based models. To read more about it, check out the "Detailed Stock Analysis" section below.

National Oilwell Varco, Inc. (NOV): Varco is engaged in providing design, manufacture and sale of equipment and components used in oil and gas drilling, completion and production operations. The company also provides oilfield services to the upstream oil and gas industry.

Varco ($13 billion market cap) has taken in $18 billion in sales over the past year. It's a favorite of my Peter Lynch- and Benjamin Graham-based models. To read more about the stock, scroll down to the "Detailed Stock Analysis" section below.



News about Validea Hot List Stocks

TrueBlue Inc. (TBI): TrueBlue announced that it has acquired workforce efficiency specialist SIMOS Insourcing Solutions, which provides on-premise staffing solutions for several Fortune 500 companies. Atlanta-based SIMOS will join TrueBlue's workforce management group, which includes Staff Management SMX, Centerline and PlaneTechs. It will continue to be managed by President and CEO Kelly Carlson.

Tesoro Corporation (TSO) Tesoro has agreed to acquire Great Northern Midstream, a crude oil logistics provider which owns and operates a recently constructed crude oil pipeline, gathering system, and transportation, storage and rail loading facilities in the Williston Basin of North Dakota. The deal includes the 97-mile BakkenLink crude oil pipeline, which connects to several third-party gathering systems, as well as a proprietary 28-mile gathering system in the core of the Bakken and a rail loading operation and storage facility that can provide outbound deliveries to the West, East and Gulf Coasts. The acquisition price represents 5 to 6 times Tesoro-estimated future EBITDA for the Great Northern Midstream business and is expected to be immediately accretive. The deal is expected to close in the first quarter of 2016.



The Next Issue

Have a wonderful holiday and a happy New Year. In two weeks, we will publish another issue of the Hot List, at which time we will take a closer look at my strategies and investment approach. 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 -15.9%
THO 12/18/2015 TBD
VLO 11/20/2015 -0.4%
SAFM 1/16/2015 -7.4%
CALM 11/20/2015 -17.6%
SYNT 11/20/2015 -4.3%
TSO 11/20/2015 -7.4%
NOV 12/18/2015 TBD
PLUS 12/18/2015 TBD
PII 10/23/2015 -22.9%


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   |   THO   |   VLO   |   SAFM   |   CALM   |   SYNT   |   TSO   |   NOV   |   PLUS   |   PII   |  

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.

Detailed Analysis


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 8.90, 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 39.05%, while it's earnings growth rate is 38.36%, 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 (2.5%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (33.8%) 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 ($1.42) 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 ($0.11) 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 1,190.91% 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 19.18%. This should be less than the growth rates for the 3 previous quarters which are -4.76%, 15.38% and 17.65%. 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, 7.84%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 1,190.91%, (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, 1,190.91% must be greater than or equal to the historical growth which is 38.36%. 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 0.15, 0.21, 0.27, 0.43 and 0.62, 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 38.36%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.

THOR INDUSTRIES, INC.

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

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.

Detailed Analysis


DETERMINE THE CLASSIFICATION:

THO is considered a "True Stalwart", according to this methodology, as its earnings growth of 19.29% lies within a moderate 10%-19% range and its annual sales of $4,115 million are greater than the multi billion dollar level. 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. THO is attractive if THO can hold its own during a recession.


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 THO was 6.14% last year, while for this year it is 6.14%. Since inventory to sales has not changed appreciably, THO passes this test.


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

The Yield-adjusted P/E/G ratio for THO (0.65), based on the average of the 3, 4 and 5 year historical eps growth rates, is O.K.


EARNINGS PER SHARE: PASS

The EPS for a stalwart company must be positive. THO's EPS ($4.03) would satisfy this criterion.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for THO (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 THO (4.97%) 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 THO (6.19%) 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: Contrarian Investor
Based on: David Dreman

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.

Detailed Analysis

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. VLO has a market cap of $34,514 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. VLO's EPS for the past 2 quarters, (from earliest to most recent quarter) 2.64, 2.79 have been increasing, and therefore the company passes this test.


EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: PASS

This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. VLO passes this test as its EPS growth rate over the past 6 months (49.19%) has beaten that of the S&P (3.83%). VLO's estimated EPS growth for the current year is (24.68%), which indicates the company is expected to experience positive earnings growth. As a result, VLO passes this test.


This methodology would utilize four separate criteria to determine if VLO 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. VLO's P/E of 7.54, based on trailing 12 month earnings, meets the bottom 20% criterion (below 11.50), 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. VLO's P/CF of 5.15 meets the bottom 20% criterion (below 5.94) and therefore passes this test.


PRICE/BOOK (P/B) VALUE: FAIL

The P/B value of a company should be in the bottom 20% of the overall market. VLO's P/B is currently 1.62, which does not meet the bottom 20% criterion (below 0.88), and it therefore fails this test.


PRICE/DIVIDEND (P/D) RATIO: FAIL

The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). VLO's P/D of 35.84 does not meet the bottom 20% criterion (below 16.95), and it therefore fails this test.


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


CURRENT RATIO: PASS

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.34] or greater than 2). This is one identifier of financially strong companies, according to this methodology. VLO's current ratio of 2.03 passes the test.


PAYOUT RATIO: PASS

A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for VLO is 15.50%, while its historical payout ratio has been 18.46%. Therefore, it passes 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 16.76%, and would consider anything over 27% to be staggering. The ROE for VLO of 23.14% 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. VLO's pre-tax profit margin is 7.35%, thus failing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. VLO's current yield is 2.79%, while the market yield is 2.78%. VLO fails this test.


LOOK AT THE TOTAL DEBT/EQUITY: PASS

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 46.58%. VLO's Total Debt/Equity of 34.62% is considered acceptable.

SANDERSON FARMS, INC.

Strategy: Value Investor
Based on: Benjamin Graham

Sanderson Farms, Inc. is a poultry processing company which is engaged in the production, processing, marketing and distribution of fresh and frozen chicken and other prepared chicken items. In addition, the Company is engaged in the processing, marketing and distribution of prepared chicken through its wholly owned subsidiary, Sanderson Farms, Inc. (Foods Division). It produces a range of processed chicken products and prepared chicken items. It sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, under the Sanderson Farms brand name to retailers, distributors, and casual dining operators in the south-eastern, south-western, north-eastern and western United States and to customers who resell frozen chicken into export markets. During the fiscal year ended October 31, 2013 (fiscal 2013), it processed 452 million chickens, or over 3.0 billion dressed pounds.

Detailed Analysis


SECTOR: PASS

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


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. SAFM's sales of $2,884.7 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: PASS

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. SAFM's current ratio of 3.61 passes the test.


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

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for SAFM is $0.0 million, while the net current assets are $394.3 million. SAFM passes this test.


LONG-TERM EPS GROWTH: FAIL

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for SAFM 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. SAFM's P/E of 11.90 (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. SAFM's Price/Book ratio is 1.65, while the P/E is 11.90. SAFM passes the Price/Book test.

CAL-MAINE FOODS INC

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

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.

Detailed Analysis


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. CALM's profit margin of 15.21% 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. CALM, with a relative strength of 74, fails this test.


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

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for CALM (417.54% for EPS, and 70.87% for Sales) are good enough to pass.


INSIDER HOLDINGS: FAIL

CALM's insiders should own at least 10% (they own 1.93%) of the company's outstanding shares. This does not satisfy the minimum requirement, and companies that do not pass this criteria are less attractive.


CASH FLOW FROM OPERATIONS: PASS

A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. CALM's free cash flow of $1.32 per share passes this test.


PROFIT MARGIN CONSISTENCY: PASS

CALM's profit margin has been consistent or even increasing over the past three years (Current year: 10.23%, Last year: 7.58%, Two years ago: 3.91%), 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 CALM's case.


CASH AND CASH EQUIVALENTS: PASS

CALM's level of cash $258.6 million passes this criteria. If a company is a cash generator, like CALM, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.


INVENTORY TO SALES: PASS

This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for CALM was 10.14% last year, while for this year it is 9.28%. Since the inventory to sales is decreasing by -0.86% the stock passes this criterion.


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 CALM was 6.07% last year, while for this year it is 6.47%. Although the AR to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive.


LONG TERM DEBT/EQUITY RATIO: PASS

CALM's trailing twelve-month Debt/Equity ratio (4.33%) is a little higher than what this methodology is looking for, but is still at an acceptable level. The superior companies that you are looking for don't need to borrow money in order to grow. This company has borrowed very little which is still OK.


"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 (CALM's is 0.37), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. CALM passes this test.

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

AVERAGE SHARES OUTSTANDING: PASS

CALM has not been significantly increasing the number of shares outstanding within recent years which is a good sign. CALM currently has 48.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.


SALES: FAIL

Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. CALM's sales of $1,829.1 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years.


DAILY DOLLAR VOLUME: FAIL

CALM does not pass the Daily Dollar Volume (DDV of $50.6 million) test. It exceeds the maximum requirement of $25 million. Stocks that fail the test are too liquid for a small individual investor and many institutions have already discovered it.


PRICE: PASS

This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. CALM with a price of $46.78 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

CALM's income tax paid expressed as a percentage of pretax income this year was (34.18%) and last year (32.16%) 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.

SYNTEL, INC.

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

Syntel, Inc. (Syntel) is a provider of digital transformation, information technology (IT) and knowledge process outsourcing (KPO) services. Syntel operates through five segments: Banking and Financial Services, Healthcare and Life Sciences, Insurance, Retail, Logistics and Telecom, and Manufacturing. The Banking and Financial Services segment serves financial institutions around the world. The Healthcare and Life Sciences segment serves various companies in the healthcare industry. The Insurance segment serves property and casualty insurers, insurance brokers, personal, commercial, life and retirement insurance service providers. The Retail, Logistics and Telecom segment serves a range of retailers and distributors, and clients in the logistics and telecom industry. The Manufacturing segment provides business consulting and technology services for industrial and automotive clients. The Company offers its products and services under the Syntel brand.

Detailed Analysis


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (15.39) relative to the growth rate (21.14%), 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 SYNT (0.73) makes it favorable.


SALES AND P/E RATIO: NEUTRAL

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 rate high enough to support a P/E above this threshold. SYNT, whose sales are $949.4 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate.


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 SYNT was 2.70% last year, while for this year it is 3.02%. 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 (0.31%) 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 SYNT is 21.1%, 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 SYNT (12.12%) to be acceptable (equity is three to 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 SYNT (5.60%) 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 SYNT (22.65%) 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.

TESORO CORPORATION

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

Tesoro Corporation is an independent petroleum refining and marketing company. Through its subsidiaries, the Company primarily transports crude oil and manufactures, transports and sells transportation fuels. The Company operates through three business segments: Refining operating segment, which owns and perates six petroleum refineries with a combined crude oil capacity of 850 thousand barrels per day (Mbpd) located in the western United States and sells transportation fuels to a variety of customers; TLLP, a publicly traded limited partnership, which includes certain crude oil and natural gas gathering assets, natural gas processing and crude oil and refined products terminalling, transportation and storage assets, and Retail operating segment, which sells transportation fuels in approximately 16 states through a network of approximately 2,267 retail stations under the ARCO, Shell, Exxon, Mobil, USA Gasoline and Tesoro brands.

Detailed Analysis


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (7.99) relative to the growth rate (34.53%), based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, 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 TSO (0.23) 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. TSO, whose sales are $30,883.0 million, needs to have a P/E below 40 to pass this criterion. TSO's P/E of (7.99) 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 TSO was 6.82% last year, while for this year it is 6.00%. Since inventory to sales has decreased from last year by -0.82%, TSO 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 TSO is 34.5%, based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, which is acceptable.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for TSO (70.60%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for TSO should be good enough to compensate.


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 TSO (3.88%) 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 TSO (-21.24%) 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.

NATIONAL-OILWELL VARCO, INC.

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

National Oilwell Varco, Inc. (NOV) is engaged in providing design, manufacture and sale of equipment and components used in oil and gas drilling, completion and production operations. The Company also provides oilfield services to the upstream oil and gas industry. The Company operates through four segments: Rig Systems, Rig Aftermarket, Wellbore Technologies, and Completion & Production Solutions. Its Rig Systems segment makes and supports the capital equipment and integrated systems needed to drill oil and gas wells on land and offshore. Its Rig Aftermarket segment provides aftermarket products and services to support land and offshore rigs, and drilling rig components manufactured by the Company's Rig Systems segment. Its Wellbore Technologies segment sells and rents solids control equipment; and provides solids control, waste management and drilling fluids services. Its Completion & Production Solutions segment provides technologies for well completions and oil and gas production.

Detailed Analysis


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Smokestack (cyclical) companies with a Price/Sales ratio between .4 and .8 represent good values according to this methodology. NOVpasses this test as its P/S of 0.71 based on trailing 12 month sales, falls within the "good values" range for cyclical companies.


TOTAL DEBT/EQUITY RATIO: PASS

Less debt equals less risk according to this methodology. NOV's Debt/Equity of 21.97% is acceptable, thus passing the test.


PRICE/RESEARCH RATIO: PASS

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


PRELIMINARY GRADE: Some Interest in NOV At this Point

Is NOV a "Super Stock"? NO


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-Smokestack(non-cyclical) companies with a Price/Sales ratio between .75 and 1.5 are good values. Otherwise, Smokestack(cyclical) companies with a Price/Sales ratio between .4 and .8 represent good values. NOV's P/S ratio of 0.71 falls within the "good values " range for cyclical industries and is considered attractive.


LONG-TERM EPS GROWTH RATE: FAIL

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. NOV's inflation adjusted EPS growth rate of 6.37% 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. NOV's free cash per share of 2.82 passes this criterion.


THREE YEAR AVERAGE NET PROFIT MARGIN: PASS

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. NOV, whose three year net profit margin averages 12.76%, passes this evaluation.

EPLUS INC.

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

ePlus inc. is an integrator of technology solutions for information technology (IT) lifecycle management. The Company is engaged in selling, leasing, financing, and managing information technology and other assets. The Company operates in two segments: technology and financing. The Company's technology segment includes sales of information technology products, third-party software, third-party maintenance, advanced professional and managed services and its software to commercial, state and local governments and government contractors. The financing segment consists of the financing of IT equipment, software and related services to commercial, state and local governments, and government contractors. The Company designs, implements and provides an array of IT solutions from multiple IT vendors, including Check Point, Cisco Systems, Dell, EMC, FireEye, F5 Networks, Hewlett-Packard, Juniper, McAfee, NetApp, Nimble, Oracle, Palo Alto Networks, Pure Storage and VMware, among others.

Detailed Analysis


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (14.99) relative to the growth rate (28.34%), 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 PLUS (0.53) makes it 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. PLUS, whose sales are $1,179.7 million, needs to have a P/E below 40 to pass this criterion. PLUS's P/E of (14.99) 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 PLUS was 2.14% last year, while for this year it is 1.74%. Since inventory to sales has decreased from last year by -0.40%, PLUS 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 PLUS is 28.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for PLUS (13.99%) to be acceptable (equity is three to 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 PLUS (0.25%) 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 PLUS (8.94%) 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.

POLARIS INDUSTRIES INC.

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

Polaris Industries Inc. (Polaris) designs, engineers and manufactures off-road vehicles (ORV), including all-terrain vehicles (ATV) and side-by-side vehicles for recreational and utility use, snowmobiles, motorcycles and small vehicles (SV). These products are sold through dealers and distributors located in the United States, Canada and Europe. The Company's ORVs include core ATVs, and RANGER and RZR side-by-side vehicles. The Company produces a range of snowmobiles, consisting of 32 models, ranging from youth models to utility and economy models to performance and competition models. Polaris' Motorcycles division consists of Victory, Indian motorcycles and three-wheel roadster motorcycle, Slingshot. The Company offer products in the light-duty hauling, people mover and urban/suburban commuting sub-sectors of the small vehicles industry. The Company produces or supplies a range of replacement parts and accessories for its product lines.

Detailed Analysis


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratio between .75 and 1.5 are good values. PII's P/S ratio of 1.14 based on trailing 12 month sales, falls within the "good values" range for non-cyclical companies and is considered attractive.


TOTAL DEBT/EQUITY RATIO: PASS

Less debt equals less risk according to this methodology. PII's Debt/Equity of 33.78% is acceptable, thus passing the test.


PRICE/RESEARCH RATIO: PASS

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


PRELIMINARY GRADE: Some Interest in PII At this Point

Is PII a "Super Stock"? NO


PRICE/SALES RATIO: FAIL

The prospective company should have a low Price/Sales ratio. To be considered a "Super Stock", non-cyclical (non-Smokestack) companies should have Price/Sales ratios below .75. However, PII, who has a P/S of 1.14, does not fall within the "Super Stock" range. It does fall between 0.75 and 1.5, which is considered the "good values" range for non-cyclical companies. Nonetheless, it does not pass this "Super Stock" criterion.


LONG-TERM EPS GROWTH RATE: PASS

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. PII's inflation adjusted EPS growth rate of 29.09% passes 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. PII's free cash per share of 2.89 passes this criterion.


THREE YEAR AVERAGE NET PROFIT MARGIN: PASS

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. PII, whose three year net profit margin averages 9.95%, passes this evaluation.


Watch List

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

Ticker Company Name Current
Score
HOMB HOME BANCSHARES INC 68%
HRTG HERITAGE INSURANCE HOLDINGS INC 61%
FNBC FIRST NBC BANK HOLDING COMPANY 59%
NSR NEUSTAR INC 53%
TREE LENDINGTREE INC 51%
TBI TRUEBLUE INC 50%
PSX PHILLIPS 66 50%
WAL WESTERN ALLIANCE BANCORPORATION 49%
REX REX AMERICAN RESOURCES CORP 48%
WETF WISDOMTREE INVESTMENTS, INC. 48%



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.