Economy & Markets

The data rolling in point to a strengthening U.S. economy, which is tracking close to 4% growth. Earlier in the year, U.S. companies got their turn, plowing massive tax cuts into equally massive share buybacks and putting out strong earnings for the first few months of the year. Now consumers get to be the heroes. Retail sales in May rose 0.8%, well above expectations and the most in six months. And this happened even with rising gas prices. Jobless claims are the lowest in more than four decades. An expected wave of big corporate mergers could keep markets lively for the next few months. Technology continues to dominate the action in the stock market, with the Nasdaq hitting all-time highs repeatedly in recent days. The sector also leads the S&P, up 14.7% as of midday Thursday, followed by consumer discretionary, up 13.3%. Telecommunications and consumer staples lag the rest. The S&P trades at 20.3 times trailing earnings and the Dow trades at 18.4.

Some positive numbers:

  1. While the 0.8% gain in retail sales in May boosted expectations for economic growth in the quarter, consumer prices rose marginally, 0.2%, in the same month.
  2. Producer prices also rose more than expected in May, to the biggest annual gain in 6.5 years.
  3. Small business optimism rose in May to its highest level in more than 30 years, the National Federation of Independent Business said Tuesday.

Some not-so-positive numbers:

  1. Despite record-high confidence on Main Street, a labor shortage issue is increasingly weighing on small businesses, according to the National Federation of Independent Businesses.
  2. The Federal Reserve hiked its benchmark short-term interest rate a quarter-point and pointed to possibly two more increases this year. That triggered concerns about an economic slowdown.
  3. Wealthy Americans are relying on family members to stay rich, according to a survey by Merrill Edge. One-third of Americans with investable assets between $50,000 and $250,000 are waiting on an inheritance to achieve financial stability.

Recommended Reading

Growth, momentum and small size factors were the best performing during the first quarter. Value was hurt by poor performance in consumer staples and some financials. The low-volatility factor helped cushion the market decline in the quarter. All of this analysis was in an article by Advisor Perspectives linked below. Here are some other blog posts and articles in case you missed them.

Hidden Figures The WSJ's Jason Zweig explains how companies are using newfangled ways to present their financials that can be misleading for investors, and they are being helped by the long bull market. Read more

Rocky Outlook Stock investors are facing conditions that aren't supportive of acceptable returns, according to a recent article in MarketWatch. This holds true even for index investors. Read more

Factor Bests Tax cuts benefited small company stocks, which are also thought to be shielded from the effects of a trade war. The best performing factors in the first quarter were growth, small-caps and momentum, while value and dividend factors were the worst. Read more

Corralling Alpha Research Affiliates founder Rob Arnott says there's a better way to index, using micro strategies to lightly enhance returns. Read more

Expectation Setting Index investors set expectations for tracking market performance less a small fee, and that's typically what they get. Read more

Rates Beat Profits Interest rates are now more important than profits for stock performance, according to WSJ. The first quarter was likely as good as it gets. Read more

Still Growing Ed Yardeni says the S&P 500 should be able to deliver 7% annual returns between now and 2025 even with moderate economic growth.Read more

China on Stage Chinese stocks will join the benchmark MSCI indexes, giving the Chinese stock market a global stage. Read more

Trend decoupling Allianz chief economic adviser Mohamed El-Erian cites three reasons for the decoupling of the market with economic trends, saying they "have an important implication for what likely lies ahead for investors. Read more

Private capital Pension funds have billions invested in private equity, and tax dollars would serve as a backstop should such pensions suffer shortfalls, notes the Boston Globe. That's not an issue until private equity stops performing well. Read more

Edgy Market Investors have flipped from "buying the dip" to waiting for an uptick and then selling. They are taking money off the table before it drops again, according to a recent article in Bloomberg. Read more

Performance Update

Since our last newsletter, the S&P 500 returned 2.9%, while the Hot List returned 2.8%. So far in 2015, the portfolio has returned -5.5% vs. 4.1% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 243.6% vs. the S&P's 178.1% gain.

News on Hot List Stocks

Seacoast Bank said it would acquire $731 million-asset First Green Bancorp to expand in Orlando and Fort Lauderdale. The deal is valued at approximately $132 million.

LGI Homes announced the opening of its first community in Alabama. It unveiled a new residential community in Birmingham.

Don't Give Up On Value Just Yet

Value investors have reason to be impatient. Growth stocks have been clobbering value stocks for some time, and this prolonged bull market and growth stock rally has left even jaded professionals wondering whether the game has completely changed.

Facebook, Apple, Amazon and the like have completely dominated the story in the last year, driving the major indexes to record heights.

It has led even some die-hard value investors to reconsider their strategies. Warren Buffett's Berkshire Hathaway has become Apple's second-biggest shareholder in less than two years even after swearing off technology stocks years ago. To be fair, he also used to steer clear of airlines stocks, and now he has big stakes in several of the major carriers.

But Buffett even acknowledged at Berkshire's annual shareholder meeting that he missed an opportunity to invest in Google and Amazon and he has admitted to misreading the opportunity at IBM.

Still, there is the question of whether growth and value have taken on different meanings in the age of passive investing. The iShares Russell 1000 Growth ETF is up more than 20 per cent in the past 12 months and 7.9 per cent year-to-date. That compares with the iShares Russell 1000 Value ETF, which is up 5.6 per cent over 12 months, but down nearly 2 per cent so far this year.

Value and growth are often seen as the opposite approaches. The former often represents companies that have mature business models with strong pricing power and steady but modest growth, such as banks, manufacturing and consumer-staples companies. Value stocks are selected based on their price relative to expectations for their prospects, which are presumably better. And they are meant to be bought and held.

Growth companies, on the other hand, are already outperforming the overall market and their peers. They tend to be trendsetters, but they aren't always profitable and their valuations are subject to the whim of investors chasing hot stocks. Technology generally falls into this category, as do health-care and consumer-discretionary companies.

Some of these stocks have taken on the characteristics of both growth and value. Apple is no longer the pure-play growth stock it once was, with a high-risk, high-reward profile. Instead, it is a brand icon with a stable business and a long-term investment reflecting optimism for consumer spending in the future.

Despite tech stocks' dazzling performance giving growth stocks a good name these days, it is value stocks that consistently win over a far longer period of time. That's perhaps because, over the longer term, human bias is less of a factor in returns. Investors naturally gravitate to stocks perceived as "good," in the recent past, but value investing often means uncovering hidden gems.

O'Shaughnessy Asset Management tried to get at the bottom of why value stocks are having a harder time in the last decade. They discovered that the financial crisis had a devastating effect on financials and energy stocks and they still haven't recovered the way value stocks rebounded in past cycles.

But evaluating value stocks forces investors to consider the strength of a business compared with expectations, and humans are naturally inclined to underestimate downtrodden companies. For investors, that means missing opportunities.

Mr. Buffett hasn't given up on his long-held bank and consumer-staples stocks, such as Wells Fargo and Coca-Cola, even though Wells has been under fire over a fake customer accounts scandal and consumer preferences are shifting away from sugary beverages such as his beloved Cherry Coke.

Investors shouldn't abandon value investing, either. If anything, the recent decade-long drought should foretell a reckoning is coming as rising interest rates benefit value stocks.

Portfolio Holdings
Ticker Date Added Return
CACC 3/9/2018 6.6%
SBCF 5/4/2018 18.2%
UFPI 6/1/2018 0.7%
SAFM 4/6/2018 -9.1%
THO 4/6/2018 -12.8%
NRZ 5/4/2018 1.2%
LGIH 6/1/2018 -3.1%
BOFI 5/4/2018 4.1%
SIVB 6/1/2018 -0.4%
MU 6/1/2018 0.7%


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

CACC   |   SBCF   |   UFPI   |   SAFM   |   THO   |   NRZ   |   LGIH   |   BOFI   |   SIVB   |   MU   |  

CREDIT ACCEPTANCE CORP.

Strategy: Growth Investor
Based on: Martin Zweig

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


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. CACC's P/E is 11.84, based on trailing 12 month earnings, while the current market PE is 37.00. 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. CACC's revenue growth is 13.62%, while it's earnings growth rate is 30.32%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, CACC 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 (12.5%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (12.1%) of the current year. Sales growth for the prior must be greater than the latter. For CACC 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. CACC's EPS ($6.17) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. CACC's EPS for this quarter last year ($4.72) 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. CACC's growth rate of 30.72% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: PASS

Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for CACC is 15.16%. This should be less than the growth rates for the 3 previous quarters, which are 22.36%, 23.28%, and 228.60%. CACC passes this test, which means that it has good, reasonably steady earnings.


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


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

If the growth rate of the prior three quarter's earnings, 92.66%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 30.72%, (versus the same quarter one year ago) then the stock fails, with one exception: if the growth rate in earnings between the current quarter and the same quarter one year ago is greater than 30%, then the stock would pass. The growth rate over this period for CACC is 30.7%, and it would therefore pass this test.


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

The EPS growth rate for the current quarter, 30.72% must be greater than or equal to the historical growth which is 30.32%. CACC 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. CACC, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 10.54, 11.92, 14.28, 16.31 and 29.14, 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. CACC's long-term growth rate of 30.32%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.


INSIDER TRANSACTIONS: PASS

A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For CACC, this criterion has not been met (insider sell transactions are 778, while insiders buying number 71). 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.

SEACOAST BANKING CORPORATION OF FLORIDA

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

Seacoast Banking Corporation of Florida is a bank holding company. The Company's principal subsidiary is Seacoast National Bank, a national banking association (the Bank). The Company and its subsidiaries offer an array of deposit accounts and retail banking services, engage in consumer and commercial lending and provide a range of trust and asset management services, as well as securities and annuity products to its customers. The Company, through its bank subsidiary, provides a range of community banking services to commercial, small business and retail customers, offering a range of transaction and savings deposit products, treasury management services, brokerage, and secured and unsecured loan products, including revolving credit facilities, letters of credit and similar financial guarantees, and asset based financing. The Bank also provides trust and investment management services to retirement plans, corporations and individuals.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (24.11) relative to the growth rate (33.18%), based on the average of the 3 and 4 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 SBCF (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. SBCF, whose sales are $206.3 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.


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 SBCF is 33.2%, based on the average of the 3 and 4 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

SBCF 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. SBCF's Equity/Assets ratio (12.00%) is 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. SBCF's ROA (1.16%) 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 SBCF (3.07%) 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 SBCF (2.14%) 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.

UNIVERSAL FOREST PRODUCTS, INC.

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

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


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (16.34) relative to the growth rate (33.48%), 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 UFPI (0.49) 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. UFPI, whose sales are $4,088.9 million, needs to have a P/E below 40 to pass this criterion. UFPI's P/E of (16.34) 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 UFPI was 12.26% last year, while for this year it is 11.68%. Since inventory to sales has decreased from last year by -0.58%, UFPI 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 UFPI is 33.5%, 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 UFPI (29.13%) 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 UFPI (2.02%) 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 UFPI (-9.81%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.

SANDERSON FARMS, INC.

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

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


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. SAFM's P/S of 0.69 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. SAFM's Debt/Equity of 0.00% is exceptional, 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. SAFM 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 SAFM At this Point

Is SAFM a "Super Stock"? YES


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.SAFM's P/S ratio of 0.69 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: PASS

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. SAFM's inflation adjusted EPS growth rate of 19.32% 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. SAFM's free cash per share of 8.74 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. SAFM, whose three year net profit margin averages 7.59%, passes this evaluation.

THOR INDUSTRIES, INC.

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

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


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. THOpasses this test as its P/S of 0.62 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. THO's Debt/Equity of 4.29% 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. THO 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 THO At this Point

Is THO a "Super Stock"? YES


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. THO's P/S ratio of 0.62 falls within the "good values " range for cyclical industries and is considered attractive.


LONG-TERM EPS GROWTH RATE: PASS

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. THO's inflation adjusted EPS growth rate of 25.09% 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. THO's free cash per share of 4.45 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. THO, whose three year net profit margin averages 5.25%, passes this evaluation.

NEW RESIDENTIAL INVESTMENT CORP

Strategy: Growth Investor
Based on: Martin Zweig

New Residential Investment Corp. is a real estate investment trust (REIT). The Company focuses on investing in, and managing, investments related to residential real estate. The Company's segments include investments in excess mortgage servicing rights (Excess MSRs); investments in mortgage servicing rights (MSRs); investments in servicer advances; investments in real estate securities; investments in residential mortgage loans; investments in consumer loans, and corporate. Its portfolio includes mortgage servicing related assets, residential mortgage backed securities (RMBS), residential mortgage loans and other investments. The Company's servicing related assets include its investments in Excess MSRs, MSRs and servicer advances. The Company invests in agency RMBS and non-agency RMBS. The Company's other investments consist of consumer loans.


P/E RATIO: FAIL

The P/E of a company must be greater than 5 to eliminate weak companies, not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. NRZ's P/E is 4.05, based on trailing 12 month earnings, while the current market P/E is 37.00. Therefore, it fails the first test.


REVENUE GROWTH IN RELATION TO EPS GROWTH: PASS

Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. NRZ's revenue growth is 71.53%, while it's earnings growth rate is 24.79%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, NRZ passes this criterion.


SALES GROWTH RATE: PASS

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (162.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (23.6%) of the current year. Sales growth for the prior must be greater than the latter. For NRZ 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. NRZ's EPS ($1.81) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. NRZ's EPS for this quarter last year ($0.42) 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. NRZ's growth rate of 330.95% 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 NRZ is 12.40%. This should be less than the growth rates for the 3 previous quarters which are 246.67%, 78.05% and 0.00%. NRZ 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, 65.84%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 330.95%, (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, 330.95% must be greater than or equal to the historical growth which is 24.79%. NRZ would therefore pass this test.


EARNINGS PERSISTENCE: FAIL

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. NRZ, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.07, 2.53, 1.32, 2.12, and 3.11, fails this test.


LONG-TERM EPS GROWTH: PASS

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. NRZ's long-term growth rate of 24.79%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.


INSIDER TRANSACTIONS: PASS

A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For NRZ, this criterion has not been met (insider sell transactions are 3, while insiders buying number 9). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.

LGI HOMES INC

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

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


MARKET CAP: PASS

The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. LGIH, with a market cap of $1,360 million, passes this criterion.


EARNINGS PER SHARE PERSISTENCE: PASS

The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. LGIH, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.07, 1.33, 2.44, 3.41 and 4.78, passes this test.


PRICE/SALES RATIO: PASS

The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. LGIH's Price/Sales ratio of 0.99, based on trailing 12 month sales, passes this criterion.


RELATIVE STRENGTH: PASS

The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. LGIH, whose relative strength is 86, is in the top 50 and would pass this last criterion.

BOFI HOLDING, INC.

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

BofI Holding, Inc. (BofI) is the holding company for BofI Federal Bank (the Bank). The Bank is a diversified financial services company. The Bank provides consumer and business banking products through its branchless, low-cost distribution channels and affinity partners. The Bank has deposit and loan customers, including consumer and business checking, savings and time deposit accounts and financing for single family and multifamily residential properties, small-to-medium size businesses in target sectors, and selected specialty finance receivables. The Bank distributes its deposit products through a range of retail distribution channels, and its deposits consist of demand, savings and time deposits accounts. Its mortgage-backed securities consist primarily of mortgage pass-through securities issued by government-sponsored entities and non-agency collateralized mortgage obligations and pass-through mortgage-backed securities issued by private sponsors.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (17.74) relative to the growth rate (29.35%), 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 BOFI (0.60) 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. BOFI, whose sales are $454.7 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.


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 BOFI is 29.4%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

BOFI 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. BOFI's Equity/Assets ratio (9.00%) is 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. BOFI's ROA (1.67%) 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 BOFI (7.82%) 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 BOFI (21.16%) 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.

SVB FINANCIAL GROUP

Strategy: Growth Investor
Based on: Martin Zweig

SVB Financial Group is a financial services company, as well as a bank holding and a financial holding company. The Company's segments include Global Commercial Bank, SVB Private Bank and SVB Capital. The Global Commercial Bank segment consists of the operations of its Commercial Bank, and of SVB Wine, SVB Analytics and its Debt Fund Investments. SVB Private Bank is the private banking division of the Bank, which provides a range of personal financial solutions for consumers. SVB Capital is the venture capital investment arm of SVB Financial Group, which focuses primarily on funds management. The Company, through its subsidiaries and divisions, offers a range of banking and financial products and services to clients across the United States. It offers services in the technology, life science/healthcare, private equity/venture capital and wine industries. The Bank and its subsidiaries, also offer asset management, private wealth management, brokerage and other investment 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. SIVB's P/E is 28.03, based on trailing 12 month earnings, while the current market PE is 37.00. 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. SIVB's revenue growth is 18.18%, while it's earnings growth rate is 20.17%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, SIVB passes this criterion.


SALES GROWTH RATE: PASS

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (34.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (31.8%) of the current year. Sales growth for the prior must be greater than the latter. For SIVB 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. SIVB's EPS ($3.63) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. SIVB's EPS for this quarter last year ($1.91) 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. SIVB's growth rate of 90.05% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: PASS

Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for SIVB is 10.08%. This should be less than the growth rates for the 3 previous quarters, which are 30.34%, 31.60%, and 35.45%. SIVB passes this test, which means that it has good, reasonably steady earnings.


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


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

If the growth rate of the prior three quarter's earnings, 32.47%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 90.05%, (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, 90.05% must be greater than or equal to the historical growth which is 20.17%. SIVB 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. SIVB, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 4.70, 5.31, 6.62, 7.31 and 9.57, 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. SIVB's long-term growth rate of 20.17%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.


INSIDER TRANSACTIONS: PASS

A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For SIVB, this criterion has not been met (insider sell transactions are 1,160, while insiders buying number 472). 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.

MICRON TECHNOLOGY, INC.

Strategy: Contrarian Investor
Based on: David Dreman

Micron Technology, Inc. is engaged in semiconductor systems. The Company's portfolio of memory technologies, including dynamic random-access memory (DRAM), negative-AND (NAND) Flash and NOR Flash are the basis for solid-state drives, modules, multi-chip packages and other system solutions. Its business segments include Compute and Networking Business Unit (CNBU), which includes memory products sold into compute, networking, graphics and cloud server markets; Mobile Business Unit (MBU), which includes memory products sold into smartphone, tablet and other mobile-device markets; Storage Business Unit (SBU), which includes memory products sold into enterprise, client, cloud and removable storage markets, and SBU also includes products sold to Intel through its Intel/Micron Flash Technology (IMFT) joint venture, and Embedded Business Unit (EBU), which includes memory products sold into automotive, industrial, connected home and consumer electronics markets.

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. MU has a market cap of $69,644 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. MU's EPS for the past 2 quarters, (from earliest to most recent quarter) 2.19, 2.78 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. MU passes this test as its EPS growth rate over the past 6 months (39.69%) has beaten that of the S&P (5.22%). MU's estimated EPS growth for the current year is (162.36%), which indicates the company is expected to experience positive earnings growth. As a result, MU passes this test.


This methodology would utilize four separate criteria to determine if MU 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. MU's P/E of 7.08, based on trailing 12 month earnings, meets the bottom 20% criterion (below 12.48), 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. MU's P/CF of 4.81 meets the bottom 20% criterion (below 7.21) 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. MU's P/B is currently 2.67, which does not meet the bottom 20% criterion (below 1.13), and it therefore fails this test.


PRICE/DIVIDEND (P/D) RATIO: FAIL

The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). MU's P/D is not available, and hence an opinion cannot be rendered at this time.


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


CURRENT RATIO: PASS

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [3.51] or greater than 2). This is one identifier of financially strong companies, according to this methodology. MU's current ratio of 2.58 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 MU is 0.00%. Unfortunately, its historical payout ratio is not available. Nonetheless it passes the payout criterion, as this is a very low payout.


RETURN ON EQUITY: PASS

The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 17.94%, and would consider anything over 27% to be staggering. The ROE for MU of 50.70% is high enough to pass this criterion.


PRE-TAX PROFIT MARGINS: PASS

This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. MU's pre-tax profit margin is 39.84%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. MU's current yield is not available (or one is not paid) at the present time, while the market yield is 2.53%. Hence, this criterion cannot be evaluated.


LOOK AT THE TOTAL DEBT/EQUITY: PASS

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 42.43%. MU's Total Debt/Equity of 36.31% is considered acceptable.


Watch List

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

Ticker Company Name Current
Score
AGX ARGAN, INC. 73%
ATHM AUTOHOME INC (ADR) 70%
SCHN SCHNITZER STEEL INDUSTRIES, INC. 68%
MGA MAGNA INTERNATIONAL INC. (USA) 55%
LMAT LEMAITRE VASCULAR INC 52%
AYI ACUITY BRANDS, INC. 49%
TNET TRINET GROUP INC 49%
DHI D. R. HORTON INC 48%
UTHR UNITED THERAPEUTICS CORPORATION 45%
MED MEDIFAST INC 43%



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