The Economy

Economic data has been mixed since our last newsletter, with investors focused on the possible "Brexit" and the latest Federal Reserve interest rate decision.

New claims for unemployment have risen slightly, and are now about 3% above where they were a year ago. The four-week average for new claims has fallen over the past two weeks, however, a good sign. Continuing claims, the data for which lag new claims by a week, are right about where they began the fortnight, and are 3.6% below year-ago levels.

Industrial production fell 0.4% in May, according to a new Federal Reserve report. Manufacturing output, the largest component of the industrial sector, also fell 0.4%, while utility output (which tends to be seasonally driven) was down 1%. Mining output rose for the first time in eight months, though by a mere 0.2%. The weak industrial data was largely due to a big drop-off in motor vehicle and parts production, the Fed said.

Retail and food service sales, meanwhile, followed up a stellar April with a strong May, rising 0.5%, according to a new report from the Census Bureau. Compared to the year-ago period, retail and food service sales were up 1.9%.

Inflation increased at a moderate pace in May, with both the core Consumer Price Index and overall CPI rising at a 2.4% annualized pace, spurred by increases in energy prices. Compared to a year ago, overall prices are 1.0% higher; core prices are 2.2% higher.

Those energy price gains involved gas prices rising from $2.22 for a gallon of regular unleaded, on average, a month ago to $2.36 on June 16, according to AAA. That's still about 16% below where it was a year ago. Oil prices have leveled off, meanwhile, in the high-$40 range.

Steadying energy prices are one of several reasons that corporate profits appear ready to rise, The Wall Street Journal's Justin Lahart wrote recently. "Fewer companies have warned on second-quarter results than they had at the same point in recent quarters --historically, a good indication [that earnings will beat expectations]," he said. "Estimates haven't fallen as sharply as usual through the quarter, which also bodes well. Moreover, neither the decline in oil prices nor the strength in the dollar will weigh on earnings like they have in recent quarters."

Amid the so-so recent economic data, the Federal Reserve decided to hold interest rates steady at its most recent meeting. In a release, the Fed's Open Market committee discussed a very mixed backdrop that it says included a slowing in the pace of improvement in the labor market; improving economic activity; growth in household spending; an improving housing sector; and soft business fixed investment.

Fed Chair Janet Yellen also said that the uncertainty of the looming "Brexit" -- Britain's possible exit from the European Union -- was a factor in the Fed's decision to leave rates unchanged. Britain will hold a referendum next Thursday, June 23, to determine whether to stay in the EU or leave. "International uncertainties loom large here. We're also looking at prospects for economic growth and continued progress in the labor market," Yellen said when asked what it would take for the Fed to raise rates twice before the end of the year, CBS News reported.

Since our last newsletter, the S&P 500 returned -1.3%, while the Hot List returned -2.0%. So far in 2016, the portfolio has returned 0.2% vs. 1.7% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 182.4% vs. the S&P's 107.7% gain.

Portfolio Update: Playing Catch-Up

It has been a subpar fortnight for the Hot List, with 8 of the portfolio's 10 holdings in the red since our last newsletter (performance figures here and below as of Thursday morning trading).

Our top performer was Anika Therapeutics Inc. (ANIK), the Massachusetts-based orthopedic medicines firm. There did not appear to be a specific catalyst for the gain, but Anika has very strong fundamentals and investors may simply be recognizing the stock's value. The firm has grown earnings per share at a 38% pace over the long term, has no long-term debt, and sports a 34% profit margin and 18% return on equity, and yet shares trade at a PE-to-growth ratio of less than 0.6.

Our other winner was Monster Beverage Corp. (MNST), but it was barely in the black, rising just a few pennies since our last newsletter.

On the downside, Valero Energy (VLO) was our worst performer, losing more than 7%. The rebound in oil prices is probably hurting Valero's shares, since higher oil prices mean higher costs for refiners like this San Antonio-based firm. Its fundamentals are strong, however: Valero has a 17% return on equity and offers a 4.7% dividend yield, but it trades for a mere 7.2 times trailing 12-month earnings and about 9 times projected earnings.

Another stock that struggled over the past two weeks was Home Bancshares (HOMB), which fell about 6.3%. Financials in general have struggled recently, as a variety of concerns -- ranging from interest rate issues to bad oil company loans to the Brexit -- have weighed on the sector. As a regional bank, Home may well be less impacted by some of those issues than the big guys, but the general pessimism in the sector seems to have brought its shares down. But the Arkansas-based company, which has expanded via a number of acquisitions in recent years, still has very good fundamentals and is a nice bounce-back candidate.

Polaris Industries (PII) has been another laggard since our last newsletter, falling more than 5%. Its shares were downgraded by an analyst from the research firm Longbow on June 10, which may well have been the catalyst for the declines. As you know, we are less concerned with what analysts say and more concerned with what the numbers on the stock's balance sheet and in its fundamentals say, and in that regard Polaris remains attractive.

While the Hot List has struggled recently, we remain very confident in the portfolio's underlying strategies and the fundamentally sound stocks that those strategies pick. In two weeks, we'll rebalance the portfolio and see which current holdings stay and which move on.

Recommended Reading

It's always interesting to hear two sides of the same financial issue -- and it is particularly intriguing when each side boasts a renowned financial guru. That's the case in the debate over the "CAPE" ratio, with Yale's Robert Shiller and Wharton finance professor Jeremy Siegel holding very different opinions on the metric's usefulness right now. Forbes' Daniel Fisher recently took a look at how these two well-respected economists see the CAPE differently, and his article is worth a look.

The CAPE -- cyclically adjusted price/earnings ratio -- is determined by dividing the S&P 500's price by the average inflation-adjusted earnings per share for the index's companies over the trailing 10 years (instead of just the most recent year, as a traditional P/E ratio would. Shiller has tracked this data back to 1871 and found a strong tendency for the CAPE to revert to the mean.

As calculated by Shiller, the CAPE is now at a worrisome level, but Siegel makes a strong case that the "E" in Shiller's CAPE -- earnings -- has been seriously distorted. Siegel says the ratio should be adjusted downward to account for the fact that several developments in accounting -- most importantly, rules requiring companies to mark their investments to market on a quarterly basis -- have made earnings much more volatile than the average since 1871. Siegel also argues that the financial sector meltdown of 2008-09 has skewed the CAPE. He sees a better future for stocks than Shiller's CAPE predicts -- though Siegel's outlook is far from wildly optimistic. I recommend checking out Fisher's piece to learn more.



Guru Spotlight: John Neff's Weighty Matters

Being different isn't easy. If you act like everyone else and things don't work out, there will be safety in numbers. (After all, if you are doing what the majority of people do, the majority of people can't criticize you, because they are doing the same thing.) If you act differently than most and things don't work out, however, you can find the world to be a lonely place.

Of course, ignoring the crowd is often the right thing to do. That's true in life, and it's certainly true in the investing world, where many of history's most successful investors have demonstrated the ability to think and act with great independence. As Benjamin Graham once wrote, "The stock investor is neither right or wrong because others agreed or disagreed with him; he is right because his facts and analysis are right."

John Neff, who compiled one of the greatest track records ever while managing the Windsor fund for three decades, certainly understood that notion. In his book, John Neff on Investing, he highlighted numerous examples of when Windsor went against the crowd, often leading to short-term criticism but long-term rewards for shareholders. In the early 1970s, for example, Neff avoided "Nifty Fifty" stocks -- a group of some of the most popular fast-growing companies in the market -- because he thought they'd gotten far too expensive. For a while, the move looked like a dubious one, as the Nifty Fifty climbed higher and higher. But Neff was right -- the high prices these stocks were commanding couldn't last. The bubble burst, and Windsor thrived while others were hit hard.

One way Neff continually showed his independent thinking throughout his career involved the makeup of his portfolio. As you can see from the excerpt below, Windsor's portfolio often strayed far from the market's norm in terms of its holdings and their weightings:

Taken From John Neff on Investing (John Wiley & Sons, 1999)


Screen Shot 2016-06-16 at 6.10.24 PM



While the Hot List uses an equal-weighting system, its approach is similar to Neff's in that it has a penchant for investing in companies outside of the mainstream of the S&P 500. Currently, for example, only two of its 10 holdings are members of the benchmark index. I believe that's a big positive. In a world in which financial data is now so easily available, the biggest, most well-known stocks are more likely to be efficiently priced than smaller, lesser-known stocks, which can still fly under the radar for a while. Plus, studies have shown that funds with high "active share" (that is, those whose holdings differ significantly from a benchmark) are more likely to beat that benchmark.

Over the long term, I think the Hot List's ability to scan through thousands of non-S&P 500 stocks in search of bargains benefits us greatly. That's not to say that you should just ignore big, well-known stocks; ignoring the crowd and going against the crowd are not one and the same. As Neff wrote, "A warning: Do not bask in the warmth of just being different. There is a thin line between being contrarian and being just plain stubborn. I revel in opportunities to buy stocks, but I will also concede that at times the crowd is right. Eventually, you have to be right on fundamentals to be rewarded."

Essentially, that's what Graham said when he talked about being neither right nor wrong because others agree with you. Whatever your personal investment style, that's a critical lesson to remember in the investment world.



News about Validea Hot List Stocks

DSW Inc. (DSW): On June 6, DSW announced that its Senior Vice President and Chief Financial Officer Mary Meixelsperger has resigned effective June 10 to pursue another opportunity. The firm said it promoted Jared Poff to Senior Vice President, Finance, and Interim Chief Financial Officer. Poff has served as Vice President of Finance, Business Development and Treasurer of DSW since January 2015. DSW has also formed a search committee to assess internal and external candidates for the Chief Financial Officer position.

DSW also announced a partnership with Feetz, the first company to use 3D printing technology to make custom fit, sustainably made shoes The two companies plan to use Feetz' technology and DSW's retail footprint and customer base to bring affordable custom fit, sustainably made shoes to consumers. Simon Nankervis, Chief Commercial Officer of DSW said the move "will allow our customers to purchase true custom fit shoes at a fraction of what traditional bespoke shoes cost. We believe that giving customers the ability to purchase on-demand, affordable, custom fit shoes has the potential to disrupt the footwear market as we know it today."



The Next Issue

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

Portfolio Holdings
Ticker Date Added Return
ANIK 5/6/2016 13.8%
HOMB 5/6/2016 -0.5%
AMSF 6/3/2016 -0.2%
THO 2/12/2016 30.1%
VLO 6/3/2016 -6.1%
CAL 6/3/2016 -2.9%
PII 6/3/2016 -3.4%
FIX 5/6/2016 3.5%
MNST 6/3/2016 1.9%
DSW 6/3/2016 -2.4%


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

ANIK   |   HOMB   |   AMSF   |   THO   |   VLO   |   CAL   |   PII   |   FIX   |   MNST   |   DSW   |  

ANIKA THERAPEUTICS INC

Strategy: Growth Investor
Based on: Martin Zweig

Anika Therapeutics, Inc. is an orthopedic medicines company. The Company offers therapeutic pain management solutions. It is engaged in developing, manufacturing and commercializing approximately 20 products based on its hyaluronic acid (HA) technology. It orthopedic medicine portfolio consists of marketed (ORTHOVISC and MONOVISC) and pipeline (CINGAL and HYALOFAST in the United States) products to alleviate pain and restore joint function by replenishing depleted HA and aiding cartilage repair and regeneration. Its therapeutic offerings consist of products in the areas, such as Orthobiologics, Dermal, Surgical, Ophthalmic and Veterinary. It offers products made from HA based on two technologies: HYAFF, which is a solid form of HA, and ACP gel, an autocross-linked polymer of HA. Its orthobiologics products primarily consist of viscosupplementation and regenerative orthopedics products. Its viscosupplementation franchise includes ORTHOVISC, ORTHOVISC mini, MONOVISC, and CINGAL.


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. ANIK's P/E is 22.50, based on trailing 12 month earnings, while the current market PE is 15.00. Therefore, it passes the first test.


REVENUE GROWTH IN RELATION TO EPS GROWTH: FAIL

Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. ANIK's revenue growth is 9.81%, while it's earnings growth rate is 37.67%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, ANIK 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 (43.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (32.9%) of the current year. Sales growth for the prior must be greater than the latter. For ANIK 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. ANIK's EPS ($0.45) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. ANIK's EPS for this quarter last year ($0.23) 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. ANIK's growth rate of 95.65% 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 ANIK is 18.84%. This should be less than the growth rates for the 3 previous quarters which are -15.00%, 37.50% and 41.18%. ANIK 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, 17.88%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 95.65%, (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, 95.65% must be greater than or equal to the historical growth which is 37.67%. ANIK 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. ANIK, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.62, 0.82, 1.39, 2.51, and 2.01, 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. ANIK's long-term growth rate of 37.67%, 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. ANIK's Debt/Equity (0.00%) is not considered high relative to its industry (125.39%) 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 ANIK, this criterion has not been met (insider sell transactions are 42, while insiders buying number 37). 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.

HOME BANCSHARES INC

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

Home BancShares, Inc. is a bank holding company. The Company is engaged in providing a range of commercial and retail banking, and related financial services to businesses, real estate developers and investors, individuals and municipalities through its community bank subsidiary, Centennial Bank (the Bank). The Company offers a range of products and services, including 24-hour Internet banking, mobile banking and voice response information, cash management, overdraft protection, direct deposit, safe deposit boxes, United States savings bonds and automatic account transfers. Cook Insurance Agency, Inc. is an independent insurance agency. Centennial Insurance Agency writes policies for commercial and personal lines of business, including insurance for property, casualty, life, health and employee benefits. The Centennial Bank trust department offers an array of trust services. These trust services is focused on personal trusts, corporate trusts and employee benefit trusts.


PROFIT MARGIN: PASS

This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. HOMB's profit margin of 33.38% passes this test.


RELATIVE STRENGTH: FAIL

The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. HOMB, with a relative strength of 82, fails this test.


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

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for HOMB (26.09% for EPS, and 25.51% for Sales) are good enough to pass.


INSIDER HOLDINGS: PASS

HOMB's insiders should own at least 10% (they own 14.43% ) of the company's outstanding shares which is the minimum required. A high percentage typically indicates that the insiders are confident that the company will do well.


CASH FLOW FROM OPERATIONS: PASS

A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. HOMB's free cash flow of $1.14 per share passes this test.


PROFIT MARGIN CONSISTENCY: PASS

HOMB's profit margin has been consistent or even increasing over the past three years (Current year: 36.62%, Last year: 33.66%, Two years ago: 30.64%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.


R&D AS A PERCENTAGE OF SALES: NEUTRAL

This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in HOMB's case.


CASH AND CASH EQUIVALENTS: PASS

HOMB's level of cash $111.3 million passes this criteria. If a company is a cash generator, like HOMB, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.


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

The "Fool Ratio" is an extremely important aspect of this analysis. If the company's Fool Ratio is between 0.5 and 0.65 (HOMB's is 0.62), the company demonstrates excellence in its fundamentals and have soundly beat the earnings estimates. HOMB passes this test.

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

AVERAGE SHARES OUTSTANDING: PASS

HOMB has not been significantly increasing the number of shares outstanding within recent years which is a good sign. HOMB currently has 141.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.


SALES: PASS

Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. HOMB's sales of $398.8 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". HOMB passes the sales test.


DAILY DOLLAR VOLUME: PASS

HOMB passes the Daily Dollar Volume (DDV of $9.7 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf."


PRICE: PASS

This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. HOMB with a price of $20.70 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.


INCOME TAX PERCENTAGE: PASS

HOMB's income tax paid expressed as a percentage of pretax income this year was (36.75%) and last year (36.19%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.

AMERISAFE, INC.

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

AMERISAFE, Inc. (AMERISAFE) is an insurance holding company. The Company provides workers' compensation insurance for small to mid-sized employers engaged in hazardous industries, principally construction, trucking, manufacturing, agriculture, and oil and gas. It is engaged in underwriting the workers' compensation exposures inherent in these industries. The Company provides coverage to employers under state and federal workers' compensation laws. The Company's workers' compensation insurance policies provide benefits to injured employees for, temporary or permanent disability, death and medical and hospital expenses. The Company provides safety services at employers' workplaces as a component of its underwriting process. It utilizes intensive claims management practices. The Company has over 8,000 voluntary business policyholders. It is licensed to provide workers' compensation insurance in approximately 50 states, the District of Columbia and the United States Virgin Islands.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (14.90) relative to the growth rate (25.80%), 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 AMSF (0.58) 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. AMSF, whose sales are $402.2 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 AMSF is 25.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

AMSF 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. AMSF's Equity/Assets ratio (31.00%) 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. AMSF's ROA (5.18%) 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 AMSF (1.97%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for AMSF (5.90%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.

THOR INDUSTRIES, INC.

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

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


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 0.78 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"? NO


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-Smokestack(non-cyclical) companies with a Price/Sales ratio between .75 and 1.5 are good values. Otherwise, Smokestack(cyclical) companies with a Price/Sales ratio between .4 and .8 represent good values. THO's P/S ratio of 0.78 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 16.97% 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 2.78 passes this criterion.


THREE YEAR AVERAGE NET PROFIT MARGIN: FAIL

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. THO, whose three year net profit margin averages 4.93%, fails this evaluation.

VALERO ENERGY CORPORATION

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

Valero Energy Corporation (Valero), through Valero Energy Partners LP (VLP), owns, operates, develops and acquires crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets. The Company operates in two segments: refining and ethanol. Its refining segment includes refining and marketing operations in the United States, Canada, the United Kingdom, Aruba and Ireland. Its ethanol segment includes ethanol and marketing operations in the United States. VLP's assets include crude oil and refined petroleum products pipeline and terminal systems in the United States Gulf Coast and the United States Mid-Continent regions. Its refineries can produce conventional gasolines, premium gasolines, gasoline meeting the specifications of the California Air Resources Board (CARB), diesel, low-sulfur diesel, ultra-low-sulfur diesel, CARB diesel, other distillates, jet fuel, asphalt, petrochemicals, lubricants and other refined products.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (7.30) relative to the growth rate (23.73%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for VLO (0.31) is very favorable.


SALES AND P/E RATIO: PASS

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. VLO, whose sales are $82,188.0 million, needs to have a P/E below 40 to pass this criterion. VLO's P/E of (7.30) is considered acceptable.


INVENTORY TO SALES: PASS

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


EPS GROWTH RATE: PASS

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for VLO is 23.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for VLO (35.51%) to be normal (equity is approximately twice debt).


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for VLO (12.15%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for VLO (-12.73%) 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.

CALERES INC

Strategy: Value Investor
Based on: Benjamin Graham

Caleres, Inc., formerly Brown Shoe Company, Inc., is a global footwear retailer and wholesaler. The Company is engaged in the operation of retail shoe stores and e-commerce Websites, as well as the design, sourcing and marketing of footwear for women and men. It operates through two segments: Famous Footwear, which includes its Famous Footwear stores and Famous.com, and Brand Portfolio, which offers retailers and consumers a portfolio of brands from its Healthy Living and Contemporary Fashion platforms. It operates approximately 1,210 retail shoe stores in the United States, Canada and Guam. It offers brands, including Nike, Skechers, Converse, Vans, adidas, Sperry, New Balance, Asics, Bearpaw and Sof Sole. It also offers Company-owned and licensed brands, including LifeStride, Dr. Scholl's, Naturalizer, Fergalicious and Carlos by Carlos Santana. Through its Brand Portfolio segment, it also designs, sources and markets footwear to retail stores domestically and internationally.


SECTOR: PASS

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


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. CAL's sales of $2,559.9 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: PASS

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. CAL's current ratio of 2.52 passes the test.


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

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for CAL is $196.7 million, while the net current assets are $479.6 million. CAL passes this test.


LONG-TERM EPS GROWTH: PASS

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. CAL's EPS growth over that period of 30.3% passes the EPS growth test.


P/E RATIO: PASS

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. CAL's P/E of 14.70 (using the 3 year PE) passes this test.


PRICE/BOOK RATIO: FAIL

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. CAL's Price/Book ratio is 1.74, while the P/E is 14.70. CAL fails the Price/Book test.

POLARIS INDUSTRIES INC.

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

Polaris Industries Inc. (Polaris) designs, engineers and manufactures off-road vehicles (ORV), including all-terrain vehicles (ATV) and side-by-side vehicles for recreational and utility use, snowmobiles, motorcycles and global adjacent markets vehicles, together with the related parts, garments and accessories. The Company's segments are ORV/Snowmobiles, Motorcycles and Global Adjacent Markets. These products are sold through dealers and distributors located in the United States, Canada, Western Europe, Australia and Mexico. Its ORVs include Sportsman ATVs, Polaris ACE, RANGER, RZR and Polaris GENERAL side-by-side vehicles. It produces snowmobiles, ranging from youth models to utility and economy models to performance and competition models. Its Motorcycles segment consists of Victory, Indian motorcycles and the moto-roadster, Slingshot. It offers products in the light-duty hauling, people mover and urban/suburban commuting sub-sectors of the Work and Transportation industry.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (13.13) relative to the growth rate (20.50%), 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 PII (0.64) 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. PII, whose sales are $4,668.9 million, needs to have a P/E below 40 to pass this criterion. PII's P/E of (13.13) 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 PII was 12.63% last year, while for this year it is 15.04%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (2.42%) is below 5%.


EPS GROWTH RATE: PASS

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for PII is 20.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for PII (57.19%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for PII should be good enough to compensate.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for PII (0.94%) 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 PII (-6.97%) 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.

COMFORT SYSTEMS USA, INC.

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

Comfort Systems USA, Inc. is a provider of mechanical contracting services, which principally includes heating, ventilation and air conditioning (HVAC), plumbing, piping and controls, as well as off-site construction, electrical, monitoring and fire protection. It installs, maintains and repairs products and systems throughout its approximately 35 operating units in 81 cities and 89 locations throughout the United States. It operates primarily in the commercial, industrial and institutional HVAC markets and offers services for the industrial, healthcare, education, office, technology, retail and government facilities. It provides a range of construction, renovation, expansion, maintenance, repair and replacement services for mechanical and related systems in commercial, industrial and institutional properties. Its installation business related to newly constructed facilities involves the design, engineering, integration, installation and start-up of mechanical and related systems.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (22.62) relative to the growth rate (23.45%), based on the average of the 3 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 FIX (0.96) 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. FIX, whose sales are $1,596.9 million, needs to have a P/E below 40 to pass this criterion. FIX's P/E of (22.62) 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 FIX was 2.57% last year, while for this year it is 2.49%. Since inventory to sales has not changed appreciably, FIX 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 FIX is 23.4%, based on the average of the 3 and 5 year historical eps growth rates, which is considered very good.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for FIX (16.14%) 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 FIX (5.55%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for FIX (0.22%) 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.

MONSTER BEVERAGE CORP

Strategy: Growth Investor
Based on: Martin Zweig

Monster Beverage Corporation, based in Corona, California, is a holding company and conducts no operating business except through its consolidated subsidiaries. The Company's subsidiaries market and distribute energy drinks, including Monster Energy energy drinks, Monster Energy Extra Strength Nitrous Technology energy drinks, Java Monster non-carbonated coffee + energy drinks, M3 Monster Energy Super Concentrate energy drinks, Monster Rehab non-carbonated energy drinks with electrolytes, Muscle Monster Energy Shakes, Ubermonster energy drinks, NOS energy drinks, Full Throttle energy drinks, Burn energy drinks, Samurai energy drinks, Relentless energy drinks, Mother energy drinks, Power Play energy drinks, BU energy drinks, Nalu energy drinks, BPM energy drinks, Gladiator energy drinks, and Ultra energy drinks.


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. MNST's P/E is 43.68, based on trailing 12 month earnings, while the current market P/E is 15.00. Therefore, it fails 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 12.64%, while it's earnings growth rate is 17.25%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, MNST 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 (8.5%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (6.6%) of the current year. Sales growth for the prior must be greater than the latter. For MNST 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. MNST's EPS ($0.79) 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 ($0.02) 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 3,850.00% 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 8.62%. This should be less than the growth rates for the 3 previous quarters which are 55.56%, 20.00% and -6.94%. 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, 24.22%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 3,850.00%, (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, 3,850.00% must be greater than or equal to the historical growth which is 17.25%. 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 1.53, 1.86, 1.95, 2.77 and 2.84, 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 17.25%, 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 (153.36%) 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 163, while insiders buying number 65). 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.

DSW INC.

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

DSW Inc. is a footwear retailer. The Company offers assortment of shoes, handbags and accessories for women, men and children. The Company operates through two segments: the DSW segment and the Affiliated Business Group (ABG) segment. The DSW segment includes DSW stores and dsw.com. The Company, through its ABG segment, partners with approximately three other retailers to help build and optimize their footwear businesses. The Company operates over 470 DSW stores, dsw.com and shoe departments in approximately 280 Stein Mart stores and Steinmart.com, over 100 Gordmans stores and Gordmans.com, and approximately one Frugal Fannie's store. Its DSW stores average approximately 21,000 square feet and carry over 21,500 pairs of shoes. In addition, it offers DSW Rewards program, through which members earn points towards certificates every time they purchase.


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. DSW's P/S of 0.64 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. DSW'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. DSW 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 DSW At this Point

Is DSW a "Super Stock"? NO


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.DSW's P/S ratio of 0.64 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors.


LONG-TERM EPS GROWTH RATE: FAIL

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. DSW's inflation adjusted EPS growth rate of 8.97% fails the test.


FREE CASH PER SHARE: PASS

This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. DSW's free cash per share of 0.78 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. DSW, whose three year net profit margin averages 5.91%, passes this evaluation.


Watch List

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

Ticker Company Name Current
Score
BMA BANCO MACRO SA (ADR) 100%
DW DREW INDUSTRIES, INC. 59%
UFPI UNIVERSAL FOREST PRODUCTS, INC. 57%
SANM SANMINA CORP 54%
FCB FCB FINANCIAL HOLDINGS INC 54%
SAFM SANDERSON FARMS, INC. 51%
HII HUNTINGTON INGALLS INDUSTRIES INC 51%
UTHR UNITED THERAPEUTICS CORPORATION 50%
WLK WESTLAKE CHEMICAL CORPORATION 49%
AGX ARGAN, INC. 45%



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