Economy & Markets

The stock market is showing signs of wear and tear as the ongoing trade war with China drags on without a resolution in sight. Investors are worried about a slowdown in the global economy, pushing them to embrace less risky investments like bonds, pushing yields lower as well. The Dow Jones Industrial Average has suffered several days of three-digit declines. And the bond market is also signaling rough waters ahead, with very short-term yields rising above the 10-year rate. When that happens, recession historically isn't far off in the future. But the Federal Reserve's Richard Clarida attempted to calm the situation, saying a rate cut could be in the offing if global risks worsen. The S&P 500 continues to be led by technology shares, followed by real estate, communication and consumer discretionary stocks. The broad index has a forward P/E of 16.95, and the Dow trades at a forward multiple of 15.62.

Some numbers to consider:

First quarter economic growth of 3.1% was slightly stronger than expectations.

The yield on the 10-year Treasury fell to its lowest in nearly two years on concerns about the China trade war. It dipped below the yield on the 3-month Treasury, an event that has led to recession in the past.

New orders for U.S.-made capital goods fell more than expected in April after a jump in the first quarter.

The White House announced a $16 billion rescue package for farmers who have been hurt by the ongoing trade war with China.

Mortgage refinancing activity is up as interest rates fall to their lowest levels since early 2018. Still, existing home sales fell 0.4% in April from March.

Earlier in May, University of Michigan's consumer sentiment index recorded the highest level in 15 years as Americans grew more upbeat on the health of the economy.

Recommended Reading

Joel Greenblatt talked about his investing experience during a recent podcast interview with Bloomberg columnist Barry Ritholtz. The reason investors don't beat the market, according to Greenblatt, is largely due to investor behavior: "People are still emotional," he argues. "If you're cold and calculating go back to what we talked about in the beginning where stocks are ownership shares of businesses...you can really take advantage of the market." Greenblatt explains the concept behind his book The Magic Formula: "We used some simple quantitative methods to show people concepts of Ben Graham who said buy it cheap." Meanwhile, an article in CFA Institute outlines behavioral biases and how to combat them. There are four primary types, the article says, including overconfidence (ego), a hesitation to try new things, the bias of prior experience, and emotion. For more on how behavior affects investing decisions, read here and here , and check below for links to articles and blog posts you may have missed.

Tax Dialysis: According to a Bloomberg article, Vanguard has figured out how to avoid taxes on its mutual funds. According to the article, the fund giant relies on a trading technique that rapidly pumps stocks in and out of a fund. Some refer to the strategy as a tax "dialysis machine." Read more

Growth Continues: Also in Bloomberg, the columnist Nir Kaissar says the current extended period of economic growth may have a ways to go, based on comments by Federal Reserve Chair Jerome Powell, who said the U.S. is "on a good path for this year" due to healthy growth, a strong labor market and low inflation. Read more

Buffett's Amazon: Berkshire Hathaway bought $860 million of Amazon stock at the end of March, according to a recent 13F filing. Bloomberg writes that the size of the investment "underscores the growing influence of Buffett's investing deputies, Todd Combs and Ted Weschler," who were instrumental in Berkshire's investments in airlines and Apple Inc. Read more

Factor Win: Institutional Investor reports on a new paper published by two executives at Research Affiliates that says the best-performing multi-factor portfolios include the momentum factor. The study by Feifei Li and Joseph Shim found that adding momentum to a $10 billion portfolio reduced trading costs by a single basis point, despite the more frequent rebalancing required with momentum stocks. Read more

Close Contact: Tim Johnston III, founder of Buffalo-based Sandhill Investment Management, talked to Barron's about the markets. His firm sold "quite a bit" of stock last summer because of valuations. He also said his method relies heavily on interaction with a company. "The gospel for us is speaking to the companies. We talk to a lot of CEOs personally, to chief financial officers, to the investor relations departments, numerous analysts on the Street." Read more

High Growth: Yahoo Finance reports that Berkshire's Amazon stock purchase signals it's ok to buy high price-to-earnings multiple companies. Berkshire's stake, it adds, seems to be founded on the notion that Amazon stock will continue push higher along with the company's growing industry dominance. Read more

Hold 'Em: Fiera Capital US Equity fund's Nadim Rizk describes his buy-and-hold strategy for Citywire. Rizk characterizes his fund's approach as "tectonic-everything is very slow," adding that he is rarely tempted to make changes. In fact, the fund made no moves in 2018, even during the Q4 correction, or so far in 2019. The fund's average hold period for a stock is 10 to 20 years. Read more

Lasting Impact: A survey by AAII Journal looked at the lasting effect of the financial crisis on investors. Out of 227 members who responded, 46% indicated that they changed their investment strategy or portfolio allocation, 22% described themselves as having become more cautious, patient or adoptive of a more conservative approach, and more than 8% said they pay more attention to the market. Read more

Data Mining: Research Affiliates found that once research data is analyzed outside the original sample period, about half the factors were not robust, according to an article co-authored by RA partner Juhani Linnainmaa, Ph.D. Researchers analyzing large databases collectively have an incentive to find a factor that works. "They are independently doing these massive amounts of data mining, so it could be that many 'factors' that have been 'found' are just not real." Read more

Yield Hungry: Carin Pai, director of equity management at wealth management firm Fiduciary Trust Company International tells The New York Times that yield hunting could be a sucker's bet. Many high-yielding funds own value stocks, which tend to trade at discounts because they are in economically sensitive industries, such as heavy manufacturing and engineering, commodities, transportation and construction and their share prices fluctuate more than some others. Read more

Activist Investing: Jeffrey Ubben of ValueAct Capital talked to CNBC about the state of activism investing. On ESG investing, Ubben argued that he has seen a flip in the investing environment from the 70's, when interest rates were high, and the economy was a material-short world. "The scarce resource (today) is human social natural capital," which is where Ubben sees the breakout returns coming. Read more

Monkey Business: A recent study suggests that blindfolded monkeys might be able to do a better job choosing stocks than the average institutional investor if they are given the darts when it's time to sell holdings, not when deciding what to buy, according to Bloomberg. Read more

Elephant Hunting: Barron's recently ran an analysis of companies that could be attractive investments for Berkshire Hathaway, based on insight from Credit Suisse. The analysts looked at "Buffet-compatible stocks" The analysis generated a list of 141 potential Berkshire acquisitions in several sectors. The twelve largest are listed in the article and include TJX, Target, Bristol-Myers Squibb, and BlackRock. Read more

Pension Woes: Public retirement systems across the country are suffering from a problems the bull market has failed to repair, The Wall Street Journal reports. Liabilities of major U.S. public pensions are up 64% since 2007 while assets are up 30%, according to the most recent data from Boston College's Center for Retirement Research. Read more

Generation You: An article in CFA Institute outlines the view by Fundstrat Global Advisors co-founder Thomas Lee that major economic shifts occur with generational milestones. For Gen X and others who invested in Amazon in 1999, that means returns that have far exceeded the S&P 500. The millennial generation will be the next to move the market, says Lee, with increased investments in digital assets and cryptocurrencies. Read more

Active Moves: Investing pros are looking to active strategies and smart beta products, according to Fidelity's annual global institutional investor fund survey. Out of 905 institutional investors in 25 countries, 41% from large institutions (of between $1 billion and $10 billion in assets) said they expected to increase their allocations to active strategies by 25%. Only 5% signaled they would increase their traditional passive positions. Read more

Buybacks Rule: A research study published last year in the Financial Analysts Journal found that net buybacks account for the bulk of the intermediate- and longer-term differences in stock market returns around the world, according to columnist Mark Hulbert. The conventional wisdom is that economic growth was the more important factor in outperformance. Read more

Airline Stocks: Warren Buffett told CNBC recently that Berkshire Hathaway's increased stake in Delta Airlines mistakenly breached his comfort threshold of 10% due to buybacks by Delta. Read more


The Fallen

As we rebalance the Validea Hot List, 5 stocks leave our portfolio. These include: Essent Group Ltd (ESNT), Royal Dutch Shell Plc (Adr) (RDS.A), Nexstar Media Group Inc (NXST), Autohome Inc (Adr) (ATHM) and Mastercard Inc (MA).

The Keepers

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

The New Additions

We are adding 5 stocks to the portfolio. These include: Thor Industries, Inc. (THO), Copart, Inc. (CPRT), Bbva Banco Frances S.a. (Adr) (BFR), Foot Locker, Inc. (FL) and Lpl Financial Holdings Inc (LPLA).

Latest Changes

Additions  
THOR INDUSTRIES, INC. THO
COPART, INC. CPRT
BBVA BANCO FRANCES S.A. (ADR) BFR
FOOT LOCKER, INC. FL
LPL FINANCIAL HOLDINGS INC LPLA
Deletions  
Essent Group Ltd ESNT
ROYAL DUTCH SHELL PLC (ADR) RDS.A
NEXSTAR MEDIA GROUP INC NXST
AUTOHOME INC (ADR) ATHM
MASTERCARD INC MA

Explaining the Struggles of Value Investing

As value investors are acutely aware, the strategy has struggled, and there's an ongoing debate about whether it will ever get fixed. It's not that value hasn't fallen out of favor before, but over the long-long-term, it has proven to be a winning bet. So, is something different about now? Validea's Jack Forehand recently wrote about this, looking at both the case for and against value. On paper, at least, it still seems like a sound idea. But, as we've seen lately, it isn't delivering. Perhaps new investing techniques using artificial intelligence have permanently damaged the proposition. Read on for Jack's view:

Value stocks have struggled for a long time now. Although the degree of underperformance can vary significantly based on the metric you use and the universe you apply it to, there is no question that the past decade has been a bad one for value investing. And the past five years have been even worse.

I have always been a big believer in value, but it is only natural for all of us to question an investment strategy that struggles for this long. These types of extended periods where an investment approach doesn't work can be the most dangerous ones because they are when our biases and emotions make sound decision making the most difficult. The pressure inside of us to make a change when something isn't working is very strong and gets stronger the longer things don't go our way. This leads many investors to abandon a strategy at exactly the wrong time. But on the other hand, other investors will get so entrenched in their beliefs that they won't see the other side, even when it becomes obvious.

When I have a high level of conviction in something, but want to make sure I am giving that conviction sufficient scrutiny, I have found that two things are the most helpful.

1. Make a written case against what I believe (I did that here)

2. Seek out the opinions of the smartest people I know on the topic (making sure to include both people who agree with me and those who don't)

Over the past few months, I have done both of those with respect to my belief in value investing and I wanted to share some of my thoughts following that process.

One of the most important things I have learned about difficult issues in investing is that there is rarely one correct answer, so I certainly don't pretend that I have found the answer and can share it here. But I have been able to refine my thought process and get a better understanding of the big picture.

Here are a few of the conclusions I have reached.

The Academic Argument for Value Still Holds

In my opinion, the first step in any process of looking at whether value still works needs to start with why it worked in the first place. If you look at the academic research, there are two reasons that are cited for why value works. The first is that value stocks are riskier, and with excess risk comes excess return. The second is that there is some degree of mispricing that goes on. Companies whose stocks trade at a discount to the market typically have significant problems in their businesses and investors tend to systematically overestimate those problems. This provides an opportunity for patient investors who buy a basket of value stocks and can wait for the mispricing to correct itself over time (and wait is certainly the operative word in the past decade because it has taken a really long time).

So the first question to consider in looking at whether value still works is whether these two supporting arguments still hold.

With respect to the first argument, it is hard to argue that value stocks have become less risky. They continue to exhibit volatility in excess of the market and they continue to have extended periods where they underperform. It is difficult to make the case after a decade of underperformance that value stocks have lost their edge because of reduced risk.

It is also hard to argue that the mispricing argument is no longer valid. The way human beings are wired hasn't changed, which means we are still going to overreact to bad news. And investment managers also still face the same career risk they always have. If they underperform their benchmark for too long, they will still get fired.

So, in my opinion, nothing has changed with respect to the academic arguments supporting value that would lead to the conclusion that it no longer works.

We Have Seen This Before

Another important thing to look at when any investment strategy struggles is whether what is going on has happened before and if so, what happened after it. In the case of value investing, decade long periods of underperformance have occurred several times before.

This chart from Larry Swedroe illustrates this concept. It looks the percentage of time that each factor underperforms over various periods.

https://www.advisorperspectives.com/articles/2018/11/05/what-to-do-when-an-investment-strategy-performs-poorly

As the chart shows, the value factor has underperformed in 14% of ten-year periods historically. In other words, in a historical context, the current decade, while not common, is something that value has experienced before.

The chart below illustrates a similar idea graphically. It looks at the difference in returns for value vs. growth over 10-year rolling periods.

The fact that the line is above zero most of the time shows that value typically outperforms growth. But there are three major exceptions: The Great Depression, the dotcom bubble and the current market. In the previous two cases, value investors were handsomely rewarded for staying the course during the down periods. So what we are seeing now is not unprecedented and the historical evidence we do have shows that value has bounced back in previous instances. Those are both positive things.

Timing the Turn is Impossible

Another thing that history teaches us is that trying to time the turn in something like value is essentially impossible. The fact that value has underperformed for a decade doesn't tell us anything about what it will do this year. If history is any guide, it does tell us that the odds that the next decade for value will be much better than the current one are very good, but there is no relationship between the length of an underperforming period and short-term results going forward. Mean reversion is a very powerful concept in investing, but it is much more useful in the long-term than the short-term. Even if value underperforms for another decade, that won't provide us with enough information to say with any significance whether a short-term turn is near.

The Chances Value Investing Doesn't Work Anymore Are Not Zero

One of the things that struck me most when I wrote the article that made the case against value investing is that some of the arguments are actually pretty strong. I think it's possible that big data and AI are going to make traditional value investing much more difficult. I also think the fact that value typically makes an explicit bet against technology by underweighting the sector (or at least the highest growth names within it) and an implicit one by owning many of the firms that technology firms like Amazon are replacing is a problematic one. Value has also tended to do better when rates and inflation are higher. If quantitative easing is going to keep rates low for a long period of time, that could be a significant issue for value.

I don't say all of this because I have lost my belief in value. Despite looking at the other side, I remain a believer and continue to stick with the strategy. I say all of this because there is certainly a plausible scenario where the turnaround that all of us that believe in value are calling for doesn't materialize or takes much longer to arrive than we think.

If there is one thing I have learned in investing, it is that almost nothing is certain. To get returns, you need to bear risk. And if there was certainty about value stocks coming back, there would be no risk.

Bringing it All Together

Where does all of this leave me in terms of my belief in the future of value investing? The best answer I can come up with is cautiously optimistic. I think the risk and mispricing arguments in favor of value still hold. I am a big believer in base rates and I like what history says about buying value stocks during periods like this. But I also recognize that I have no ability to time the turn and I recognize that a bounce back in value is not a certainty, no matter how hard I try to convince myself it is. I also recognize that some very smart people disagree with me on this and I need to continue to read and understand their arguments as much as possible to combat my own confirmation bias.

So if you were looking for a definitive take on the future of value, you won't get it here. But I certainly have learned a lot studying the issue and I am confident that will make me a better investor going forward.

Newcomers to the Hot List

BBVA Banco Frances SA (ADR) (BFR) - Shares of this Argentinian bank score highly on the models tracking the styles of Warren Buffett, Peter Lynch and Martin Zweig.

Foot Locker Inc. (FL) - Shares of this athletic footwear and apparel retailer score well on the models tracking seven of Validea's gurus, including Benjamin Graham, Thomas Carlisle and James O'Shaughnessy.

Copart Inc. (CPRT) - This provider of online auctions and used vehicle sales also scores highly on multiple models, including those tracking Wayne Thorp, Dashan Huang and Warren Buffett.

LPL Financial Holdings Inc. (LPLA) - Shares of this financial advisory firm score well on the models tracking Wayne Thorp, Peter Lynch and Validea's momentum portfolio.

Thor Industries Inc. (THO) - This recreational vehicle maker scores well on the models tracking Kenneth Fisher, Tobias Carlisle, Peter Lynch and Joel Greenblatt.

News on Hot List Stocks

Copart said third-quarter sales jumped 15.7% year over year to $553.1 million, better than the 5% gain in the second quarter. Net income increased 51.3% year over year, to $553 million.

Foot Locker said first quarter sales rose 2.5% to $2.08 billion, falling short of expectations. Same store sales gains of 4.6% also fell short of expectations for a gain of 5.5%.

LPL Financial said it would buy Florida-based brokerage Allen & Co., which brings about 30 advisors and $3 billion of client assets.


Portfolio Holdings
Ticker Date Added Return
CACC 5/3/2019 -6.9%
LUKOY 4/5/2019 -10.5%
FL 5/31/2019 TBD
BMA 4/5/2019 9.3%
MNST 5/3/2019 -1.3%
LPLA 5/31/2019 TBD
EME 5/3/2019 -1.7%
CPRT 5/31/2019 TBD
THO 5/31/2019 TBD
BFR 5/31/2019 TBD


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

CACC   |   LUKOY   |   FL   |   BMA   |   MNST   |   LPLA   |   EME   |   CPRT   |   THO   |   BFR   |  

CREDIT ACCEPTANCE CORP.

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

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.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (14.53) relative to the growth rate (24.99%), 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 CACC (0.58) 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. CACC, whose sales are $1,344.0 million, needs to have a P/E below 40 to pass this criterion. CACC's P/E of (14.53) is considered acceptable.


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 CACC is 25.0%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

CACC 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. CACC's Equity/Assets ratio (30.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion.


RETURN ON ASSETS: PASS

This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. CACC's ROA (10.07%) 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 CACC (7.50%) 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 CACC (-47.80%) 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.

NK LUKOIL PAO (ADR)

Strategy: Value Investor
Based on: Benjamin Graham

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


SECTOR: PASS

LUKOY 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 $1 billion. LUKOY's sales of $126,679.7 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: FAIL

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. LUKOY's current ratio of 1.62 fails 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 LUKOY is $8,146.4 million, while the net current assets are $8,806.4 million. LUKOY 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 10 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. LUKOY's EPS growth over that period of -10.4% fails the EPS growth test.


P/E RATIO: PASS

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. LUKOY's P/E of 8.90 (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. LUKOY's Price/Book ratio is 0.88, while the P/E is 8.90. LUKOY passes the Price/Book test.

FOOT LOCKER, INC.

Strategy: Contrarian Investor
Based on: David Dreman

Foot Locker, Inc. is a retailer of shoes and apparel. The Company operates through two segments: Athletic Stores and Direct-to-Customers. The Company is an athletic footwear and apparel retailer, which include businesses, such as include Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep and SIX:02. The Direct-to-Customers segment is multi-branded and sells directly to customers through Internet and mobile sites and catalogs. The Direct-to-Customers segment operates the Websites for eastbay.com, final-score.com, eastbayteamsales.com and sp24.com. Additionally, this segment includes the Websites, both desktop and mobile, aligned with the brand names of its store banners (footlocker.com, ladyfootlocker.com, six02.com kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu, runnerspoint.com and sidestep-shoes.com).

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. FL has a market cap of $4,578 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. FL's EPS for the past 2 quarters, (from earliest to most recent quarter) 1.36, 1.52 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. FL passes this test as its EPS growth rate over the past 6 months (63.44%) has beaten that of the S&P (-12.07%). FL's estimated EPS growth for the current year is (14.03%), which indicates the company is expected to experience positive earnings growth. As a result, FL passes this test.


This methodology would utilize four separate criteria to determine if FL 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. FL's P/E of 8.95, based on trailing 12 month earnings, meets the bottom 20% criterion (below 10.29), and therefore passes this test.


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

The P/CF of a company should be in the bottom 20% of the overall market. FL's P/CF of 6.61 does not meet the bottom 20% criterion (below 5.79), and therefore fails this test.


PRICE/BOOK (P/B) VALUE: FAIL

The P/B value of a company should be in the bottom 20% of the overall market. FL's P/B is currently 1.76, which does not meet the bottom 20% criterion (below 0.94), and it therefore fails this test.


PRICE/DIVIDEND (P/D) RATIO: FAIL

The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). FL's P/D of 26.81 does not meet the bottom 20% criterion (below 18.21), 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 [1.82] or greater than 2). This is one identifier of financially strong companies, according to this methodology. FL's current ratio of 2.01 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 FL is 22.50%, while its historical payout ratio has been 30.63%. 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 17.52%, and would consider anything over 27% to be staggering. The ROE for FL of 20.19% 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. FL's pre-tax profit margin is 8.98%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. FL's current yield is 3.73%, while the market yield is 2.77%. FL 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 64.18%. FL's Total Debt/Equity of 4.72% is considered acceptable.

BANCO MACRO SA (ADR)

Strategy: Growth Investor
Based on: Martin Zweig

Banco Macro SA is an Argnetina-based financial institution (the Bank) that offers traditional bank products and services to companies, including those operating in regional economies, as well as to individuals. In addition, the Bank performs certain transactions through its subsidiaries, including mainly Banco del Tucuman, Macro Bank Ltd, Macro Securities SA, Macro Fiducia SA and Macro Fondos SGFCI SA. It has approximately two categories of customers, such as retail customers, including individuals and entrepreneurs and corporate customers, which include small, medium and large companies and major corporations. In addition, it provides services to over four provincial governments. It provides its corporate customers with traditional banking products and services, such as deposits, lending (including overdraft facilities), check cashing advances and factoring, guaranteed loans and credit lines for financing foreign trade and cash management services.


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 7.37, based on trailing 12 month earnings, while the current market PE is 19.00. 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 46.49%, while it's earnings growth rate is 41.65%, 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 (80.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (115.2%) of the current year. Sales growth for the prior must be greater than the latter. For BMA this criterion has not been met and fails this test.


The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria.


CURRENT QUARTER EARNINGS: PASS

The first of these criteria is that the current EPS be positive. BMA's EPS ($2.58) 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 ($0.10) 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 2,480.00% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: PASS

Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for BMA is 20.83%. This should be less than the growth rates for the 3 previous quarters, which are 44.44%, 80.00%, and 116.67%. BMA 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, 83.87%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 2,480.00%, (versus the same quarter one year ago) then the stock passes.


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

The EPS growth rate for the current quarter, 2,480.00% must be greater than or equal to the historical growth which is 41.65%. 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 0.13, 0.19, 0.25, 0.36 and 0.53, 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 41.65%, 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 BMA, this criterion has not been met (insider sell transactions are 0, while insiders buying number 0). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.

MONSTER BEVERAGE CORP

Strategy: Growth Investor
Based on: Martin Zweig

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


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. MNST's P/E is 33.40, based on trailing 12 month earnings, while the current market PE is 19.00. 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. MNST's revenue growth is 11.44%, while it's earnings growth rate is 20.74%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, MNST fails this criterion.


SALES GROWTH RATE: FAIL

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (11.2%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (14.1%) of the current year. Sales growth for the prior must be greater than the latter. For MNST 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. MNST's EPS ($0.48) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. MNST's EPS for this quarter last year ($0.38) 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. MNST's growth rate of 26.32% 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 MNST is 10.37%. This should be less than the growth rates for the 3 previous quarters which are 26.32%, 26.32% and 2.38%. MNST 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, 17.80%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 26.32%, (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, 26.32% must be greater than or equal to the historical growth which is 20.74%. MNST 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. MNST, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.92, 0.95, 1.19, 1.50 and 1.76, 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. MNST's long-term growth rate of 20.74%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.


TOTAL DEBT/EQUITY RATIO: PASS

A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. MNST's Debt/Equity (0.00%) is not considered high relative to its industry (129.20%) and passes this test.


INSIDER TRANSACTIONS: PASS

A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For MNST, this criterion has not been met (insider sell transactions are 10, while insiders buying number 21). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.

LPL FINANCIAL HOLDINGS INC

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

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


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (14.64) relative to the growth rate (30.77%), 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 LPLA (0.48) 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. LPLA, whose sales are $5,318.5 million, needs to have a P/E below 40 to pass this criterion. LPLA's P/E of (14.64) is considered acceptable.


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 LPLA is 30.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

LPLA 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. LPLA's Equity/Assets ratio (18.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion.


RETURN ON ASSETS: PASS

This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. LPLA's ROA (9.25%) 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 LPLA (4.44%) 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 LPLA (-12.14%) 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.

EMCOR GROUP INC

Strategy: Growth Investor
Based on: Martin Zweig

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


P/E RATIO: PASS

The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. EME's P/E is 15.54, based on trailing 12 month earnings, while the current market PE is 19.00. Therefore, it passes the first test.


REVENUE GROWTH IN RELATION TO EPS GROWTH: FAIL

Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. EME's revenue growth is 5.89%, while it's earnings growth rate is 18.81%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, EME fails this criterion.


SALES GROWTH RATE: PASS

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (13.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (10.8%) of the current year. Sales growth for the prior must be greater than the latter. For EME this criterion has been met.


The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria.


CURRENT QUARTER EARNINGS: PASS

The first of these criteria is that the current EPS be positive. EME's EPS ($1.28) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. EME's EPS for this quarter last year ($0.94) pass this test.


POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS

The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. EME's growth rate of 36.17% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: PASS

Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for EME is 9.40%. This should be less than the growth rates for the 3 previous quarters, which are 27.37%, 25.69%, and 475.00%. EME passes this test, which means that it has good, reasonably steady earnings.


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


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

If the growth rate of the prior three quarter's earnings, 73.68%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 36.17%, (versus the same quarter one year ago) then the stock fails, with one exception: if the growth rate in earnings between the current quarter and the same quarter one year ago is greater than 30%, then the stock would pass. The growth rate over this period for EME is 36.2%, and it would therefore pass this test.


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

The EPS growth rate for the current quarter, 36.17% must be greater than or equal to the historical growth which is 18.81%. EME would therefore pass this test.


EARNINGS PERSISTENCE: PASS

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. EME, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.58, 2.72, 3.02, 3.16 and 4.89, passes this test.


LONG-TERM EPS GROWTH: PASS

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. EME's long-term growth rate of 18.81%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.


TOTAL DEBT/EQUITY RATIO: PASS

A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. EME's Debt/Equity (16.51%) is not considered high relative to its industry (51.15%) and passes this test.


INSIDER TRANSACTIONS: PASS

A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For EME, this criterion has not been met (insider sell transactions are 6, while insiders buying number 39). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.

COPART, INC.

Strategy: Patient Investor
Based on: Warren Buffett

Copart, Inc. (Copart) is a provider of online auctions and vehicle remarketing services in the United States, Canada, the United Kingdom, the United Arab Emirates, Oman, Bahrain, Brazil, Ireland, Spain and India. The Company also provides vehicle remarketing services in Germany. The Company operates through two segments: United States and International. The Company provides vehicle sellers with a range of services to process and sell vehicles primarily over the Internet through its virtual bidding third generation Internet auction-style sales technology (VB3). The Company's service offerings include Online Seller Access, Salvage Estimation Services, Estimating Services, End-Of-Life Vehicle Processing, Virtual Insured Exchange (VIX), Transportation Services, Vehicle Inspection Stations, On-Demand Reporting, Department of Motor Vehicle (DMV) Processing, Flexible Vehicle Processing Programs, Buy It Now, Member Network, Sales Process, Copart Dealer Services, CashForCars.com and U-Pull-It.

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

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


LOOK FOR EARNINGS PREDICTABILITY: PASS

Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.41, 0.45, 0.54, 0.70, 0.69, 0.68, 0.84, 1.11, 1.66, 1.76. Buffett would consider CPRT's earnings predictable, although earnings have declined 2 time(s) in the past seven years, with the most recent decline 5 years ago. The dips have totaled 2.9%. CPRT's long term historical EPS growth rate is 14.9%, based on the 10 year average EPS growth rate.


LOOK AT THE ABILITY TO PAY OFF DEBT PASS

Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. CPRT has a debt of 398.8 million and earnings of 540.3 million, which could be used to pay off the debt in less than two years, which is considered exceptional.


LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: PASS

Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for CPRT, over the last ten years, is 23.9%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 15.0%, 13.8%, 25.8%, 31.1%, 22.9%, 17.1%, 20.8%, 31.5%, 34.9%, 26.1%, and the average ROE over the last 3 years is 30.8%, thus passing this criterion.


LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: PASS

Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for CPRT, over the last ten years, is 16.9% and the average ROTC over the past 3 years is 20.8%, which is high enough to pass. It is not enough that the average be at least 12%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROTC must be at least 9% for Buffett to feel comfortable that the ROTC is consistent. The ROTC for the last 10 years, from earliest to latest, is 15.0%, 13.8%, 16.3%, 18.8%, 16.5%, 14.0%, 12.9%, 18.2%, 23.3%, 20.8%, thus passing this criterion.


LOOK AT CAPITAL EXPENDITURES: PASS

Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. CPRT's free cash flow per share of $1.02 is positive, indicating that the company is generating more cash that it is consuming. This is a favorable sign, and so the company passes this criterion.


LOOK AT MANAGEMENT'S USE OF RETAINED EARNINGS: PASS

Buffett likes to see if management has spent retained earnings in a way that benefits shareholders. To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $8.84 and compares it to the gain in EPS over the same period of $1.35. CPRT's management has proven it can earn shareholders a 15.3% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work.


HAS THE COMPANY BEEN BUYING BACK SHARES: BONUS PASS

Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. CPRT's shares outstanding have fallen over the past five years from 252,289,993 to 238,000,000, thus passing this criterion. This is a bonus criterion and will not adversely affect the ability of a stock to pass the strategy as a whole if it is failed.

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

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


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

Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $2.27 and divide it by the current market price of $71.55. An investor, purchasing CPRT, could expect to receive a 3.17% initial rate of return. Furthermore, he or she could expect the rate to increase 14.9% per year, based on the 10 year average EPS growth rate, as this is how fast earnings are growing.


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

Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 3.25%. Compare this with CPRT's initial yield of 3.17%, which will expand at an annual rate of 14.9%, based on the 10 year average EPS growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding.


CALCULATE THE FUTURE EPS: [No Pass/Fail]

CPRT currently has a book value of $7.08. It is safe to say that if CPRT can preserve its average rate of return on equity of 23.9% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 23.9% and it will have a book value of $60.30 in ten years. If it can still earn 23.9% on equity in ten years, then expected EPS will be $14.41.


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

Now take the expected future EPS of $14.41 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (31.6) (5 year average P/E in this case), which is 24.6 and you get CPRT's projected future stock price of $354.43.


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

Now add in the total expected dividend pool to be paid over the next ten years, which is $0.00. This gives you a total dollar amount of $354.43. These numbers indicate that one could expect to make a 17.4% average annual return on CPRT's stock at the present time. Buffett would consider this a great return.


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

If you take the EPS growth of 14.9%, based on the 10 year average EPS growth rate, you can project EPS in ten years to be $9.08. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (31.6) (5 year average P/E in this case), which is 24.6. This equals the future stock price of $223.37. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $223.37.


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

Now you can figure out your expected return based on a current price of $71.55 and the future expected stock price, including the dividend pool, of $223.37. If you were to invest in CPRT at this time, you could expect a 12.06% average annual return on your money. Buffett likes to see a 15% return, but nonetheless would accept this return.


LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: PASS

Based on the two different methods, you could expect an annual compounding rate of return somewhere between 12.1% and 17.4%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 14.7% on CPRT stock for the next ten years, based on the current fundamentals. Buffett likes to see a 15% return, but nonetheless would accept this return, thus passing the criterion.

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 0.42 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 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. 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 0.42 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 25.41% 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 4.74 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. THO, whose three year net profit margin averages 5.31%, passes this evaluation.

BBVA BANCO FRANCES S.A. (ADR)

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

BBVA Banco Frances S.A. (the Bank) is a provider of financial services to large corporations, small and medium-size companies (SMEs), as well as individual customers. The Bank is focused on the financial sector, through its activities related to banking/financial, pension fund manager and insurance. The Bank has all its operations, property and customers located in Argentina. As part of its business, the Bank conducts capital markets and securities operations directly in the over-the-counter market and indirectly in Bolsa de Comercio de Buenos Aires (BCBA). Its corporate banking is divided by industry, such as consumer, heavy industries and energy. The Bank's business lines include Retail Banking, Enterprise Banking, and Corporate and Investment Banking. Enterprise Banking offers both short- and long-term financing. The Corporate and Investment Banking business line is concerned with foreign trade transactions, and advice in mergers and acquisitions and in capital market transactions.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (5.74) relative to the growth rate (30.63%), 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 BFR (0.19) 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. BFR, whose sales are $1,300.7 million, needs to have a P/E below 40 to pass this criterion. BFR's P/E of (5.74) is considered acceptable.


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 BFR is 30.6%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

BFR 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. BFR's Equity/Assets ratio (11.00%) 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. BFR's ROA (4.62%) is above the minimum 1% that this methodology looks for, thus passing the criterion.


FREE CASH FLOW: BONUS PASS

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it 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 BFR (38.76%) is high enough to add to the attractiveness of the stock.


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 BFR (2.53%) 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.


Watch List

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

Ticker Company Name Current
Score
KNSL KINSALE CAPITAL GROUP INC 63%
MBT MOBIL'NYE TELESISTEMY PAO (ADR) 51%
DRI DARDEN RESTAURANTS, INC. 48%
SNDR SCHNEIDER NATIONAL INC 47%
TEF TELEFONICA S.A. (ADR) 47%
TX TERNIUM SA (ADR) 47%
AYI ACUITY BRANDS, INC. 46%
AMTD TD AMERITRADE HOLDING CORP. 44%
NSP INSPERITY INC 42%
RGEN REPLIGEN CORPORATION 40%



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