Economy & Markets

An escalating trade war, at least in words, between the US and China is rattling global markets. The American stock markets have seen wild daily swings for the last two weeks, since the Trump administration announced plans to put import taxes on billions of dollars of Chinese technology and other products. This comes after he first riled markets by imposing import taxes on steel and aluminum, and then exempted major trading partners such as Canada and members of the European Union. The stock market has reacted sharply with each announcement only to rebound on equally strong momentum. The S&P 500 is now essentially flat for the year but has given up nearly 2 percent in the last month. It is being led by strength in consumer discretionary stocks and technology but financials have also performed well in recent trading. The S&P 500 trades at 20.11 times trailing 12-month earnings, and the Dow Jones industrial average at 19.

Some positive numbers:

  1. Consumer sentiment is still at its highest since 2004, though it dipped slightly at the end of March, according to University of Michigan's survey. And consumer spending rose in February for the second straight month even as households boosted savings.
  2. Washington avoided putting tariffs on Chinese shoes and clothes but American manufacturers are caught in the escalating trade war as costs for components and supplies are likely to rise.
  3. Hiring at private US employers rose more than expected in March, and the manufacturing industry had the strongest job gains in more than three years.

Some not-so-positive numbers:

  1. Interest rates are at their lowest in two months but mortgage applications have fallen as volatile stock markets spook potential homeowners, according to the Mortgage Bankers Association.
  2. Growth in non-manufacturing economic activity slowed in March after falling in February, according to the Institute of Supply Management.
  3. The U.S. trade deficit increased to a nine year high in February, to $57.6 billion, according to the Commerce Department. The goods trade deficit is the highest since July 2008 and the services surplus was the lowest since December 2012.

Recommended reading

People are still trying to figure out how to maneuver this late bull market, given rising interest rates in the U.S. and fiscal stimulus that could overheat the economy and force policy makers to act quickly on inflation. None of this is throwing a wet blanket on corporate earnings, yet, reason enough for many to see more market gains in the near-term. Here are some recent articles and blog posts, in case you missed them.

Private Markets The number of publicly traded companies is half what it was in the 1990s and public stock debuts have dropped considerably in number. Silicon Valley's unicorns can raise as much money as they need in venture capital and don't see the need to turn to the stock market. Read more

The Under-saved The Federal Reserve Bank in St. Louis found that 35 percent of U.S. households don't participate in any retirement savings plan and many of those households that participate in them have low account balances. Read more

Value Guru Oakmark's Bill Nygren got into stocks because the tables were next to the baseball stats in the newspaper when he was a kid. He gave an hour-long talk at Google about his career and value investing. Read more

Emotion Check Loss aversion focuses on the negative, according to an article in Psychology Today. Consumers will react more strongly to an increase in price than a decrease in price. It also reflects bias against change. Regulating emotions can help people overcome disadvantageous biases. Read more

Buy Boom Volatility hasn't dampened stock analysts' enthusiasm. FactSet data show that 52% of S&P 500 stocks have buy ratings, and only 5% have sell ratings. The number of buy ratings has also risen with the run-up of the market in the last year. Read more

Connections Matter AQR's Jeremy Getson is one of the best connected people in hedge funds, according to Institutional Investors recent profile. Gertson was instrumental in developing AQR's approach to factor investing and alternative beta. Read more

Broken Style Investors don't have to pick between growth and value, because both styles are broken, according to a recent Bloomberg article. Now, because of passive investing, a significant amount of money is concentrated on sectors and stocks tracking indexes. Read more

Sales Growth An article in The Wall Street Journal concludes that there are still ways for stocks to keep rising in this late bull market along with bond yields, but investors should look to profit from strong sales from Main Street. Read more

Dunn's Law Morningstar recently looked at Dunn's law to see if active managers outperform indexes because they have stylistic differences. It concluded that it is difficult to predict when certain investment styles will be in favor, so it's best to accept volatility in active portfolios. Read more

Bull's Birthday The bull market recently passed its ninth anniversary, and Barry Ritholtz wrote about it in a recent Bloomberg column. March 2009 was a scary time for the stock market, with many people still fleeing. Ritholtz warns investors that picking the wrong starting point for a bull market can lead to costly mistakes. Read more

Index Help Ed Thorp used math to figure out how to beat the roulette wheel and then used it to conquer the stock market. But he recently told Barron's that investors would do well with index investing. Read more

Since our last newsletter, the S&P 500 returned 0.7%, while the Hot List returned -0.6%. So far in 2018, the portfolio has returned -10.6% vs. -0.4% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 225.2% vs. the S&P's 166.2% gain.

The Fallen

As we rebalance the Validea Hot List, 5 stocks leave our portfolio. These include: Signet Jewelers Ltd. (SIG), Cutera, Inc. (CUTR), Micron Technology, Inc. (MU), Paycom Software Inc (PAYC) and Ipg Photonics Corporation (IPGP).

The Keepers

5 stocks remain in the portfolio. They are: Magna International Inc. (Usa) (MGA), Credit Acceptance Corp. (CACC), Toll Brothers Inc (TOL), Stamps.com Inc. (STMP) and Trinet Group Inc (TNET).

The New Additions

We are adding 5 stocks to the portfolio. These include: Thor Industries, Inc. (THO), Sanderson Farms, Inc. (SAFM), Alliance Data Systems Corporation (ADS), Five Below Inc (FIVE) and Autohome Inc (Adr) (ATHM).

Latest Changes

Additions  
THOR INDUSTRIES, INC. THO
SANDERSON FARMS, INC. SAFM
ALLIANCE DATA SYSTEMS CORPORATION ADS
FIVE BELOW INC FIVE
AUTOHOME INC (ADR) ATHM
Deletions  
SIGNET JEWELERS LTD. SIG
CUTERA, INC. CUTR
MICRON TECHNOLOGY, INC. MU
PAYCOM SOFTWARE INC PAYC
IPG PHOTONICS CORPORATION IPGP

Graham's Most Important Contribution

Value investing isn't in style these days but it is synonymous with some of the most famous investors of the last century, including Benjamin Graham and his protege, Warren Buffett of Berkshire Hathaway.

Graham first published his thoughts on investing during the height of the Great Depression, and his view was shaped by the excesses seen in the markets of the late 1920s. His philosophy looked at buying stocks that looked cheap based on their assets or earnings, acting like a business owner and not a specuRobotor chasing a hot name. The right stock had a margin of safety given its price, something that gave the investor a cushion against permanent capital loss. Mind you, this was influenced by the markets of 1929-1932, when stocks erased 80% of their value.

Value investing sounds like a simple concept, but its popularity has come in and out of favor. Graham's more important contribution to investing is the manner in which he analyzed stocks.

Until he came along, the notion of professionalized, disciplined analysis hadn't been developed. Ratios and financial metrics weren't really used to pick stocks. The business wasn't as important a factor in selecting stocks as the rumors that drove them higher or lower. Graham and David Dodd were professors at Columbia Business School and co-wrote a book called Security Analysis that changed this thinking. It has been called the first real attempt to analyze securities beyond bonds.

Graham's more famous work is the 1949 book The Intelligent Investor, which boiled down his analysis method for regular investors. Buffett has praised it as the best book on investing ever written. At the time it was released the markets had come back to life in post-WWII America. The 1950s and 60s would be one of the best era for investors, especially those who owned large company stocks like General Electric, Coca-cola and IBM, the so-called "Nifty 50". Compared to the overall market, these stocks traded at nose-bleed multiples. Value investing was officially dead.

But disciples of Graham were still around, just starting out their investing careers. In 1982, Buffett outlined in Berkshire's letter to shareholders a set of principles for analyzing and buying companies, and it sounded very Graham-like. It reads like a step by step checklist of investing criteria:

  1. Make large purchases ($5 million of after tax earnings)
  2. Pick companies that demonstrate consistent earnings power
  3. Focus on busineses earning good returns on equity while employing little or no debt
  4. Have a management already in place
  5. Focus on simple businesses (not a lot of hard to understand technology)
  6. Have an offering price. Don't get in a bidding war

Another Columbia professor, Bruce Greenwald, has said Graham's biggest contribution is this practice of looking systemically at balance sheets and income statements to decide whether to buy or sell. It has served Buffett and other famous value investors well over the long-term, even if the strategy, like today, is not in favor.

At Validea we have created investment strategies inspired by Graham, Buffett and others that analyze publically available data in a similarly systematic approach. We use both active and passive strategies that screen for the same fundamentals that Graham and other guru investors used in their own analysis. The models are able to filter through a huge amount of data to see what scores well. We believe that investing based on proven strategies and underlying fundamentals, using a disciplined approach, can increase the odds of outperforming over the long-term. That may indeed be Graham's most valuable lesson.

Newcomers to the Hot List

Alliance Data Systems Inc. (ADS)

A provider of loyalty and marketing services and supply chain solutions, this stock passes the tests of guru investors like John Neff, Warren Buffett, Martin Zweig and Peter Lynch.

Autohome Inc. (ADR) (ATHM)

China's online site for automobile buyers and sellers, it passes the tests of investors Martin Zweig and Peter Lynch and scores well on Validea's momentum model portfolio.

Five Below Inc. (FIVE)

The fashion and accessories retailer aimed at teens and pre-teens scores highly on the Martin Zweig and Peter Lynch models as well as the momentum portfolio.

Sanderson Farms, Inc. (SAFM)

This poultry processing company passes the test of the models tracking Peter Lynch and Kenneth Fisher and scores highly on the model tracking Benjamin Graham.

Thor Industries, Inc. (THO)

This recreational vehicle maker aces the tests of investors James O'Shaughnessy, Kenneth Fisher and Joel Greenblatt and scores highly on the model tracking Peter Lynch.

News on Hot List Stocks

TriNet named Michael Mendenhall chief marketing officer. He was most recently the chief marketing officer at IBM and chief communications officer for IBM Watson and Cloud Platform

Portfolio Holdings
Ticker Date Added Return
THO 4/6/2018 TBD
CACC 3/9/2018 -3.8%
TOL 3/9/2018 -1.3%
MGA 3/9/2018 10.9%
STMP 3/9/2018 3.0%
FIVE 4/6/2018 TBD
TNET 3/9/2018 -0.2%
ADS 4/6/2018 TBD
ATHM 4/6/2018 TBD
SAFM 4/6/2018 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

THO   |   CACC   |   TOL   |   MGA   |   STMP   |   FIVE   |   TNET   |   ADS   |   ATHM   |   SAFM   |  

THOR INDUSTRIES, INC.

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

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).


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (13.22) relative to the growth rate (27.41%), 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 THO (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. THO, whose sales are $8,153.1 million, needs to have a P/E below 40 to pass this criterion. THO's P/E of (13.22) 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 THO was 8.81% last year, while for this year it is 6.35%. Since inventory to sales has decreased from last year by -2.46%, THO 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 THO is 27.4%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for THO (4.58%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for THO (3.86%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for THO (2.35%) 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.

CREDIT ACCEPTANCE CORP.

Strategy: Contrarian Investor
Based on: David Dreman

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.

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. CACC has a market cap of $6,311 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. CACC's EPS for the past 2 quarters, (from earliest to most recent quarter) 5.19, 14.13 have been increasing, and therefore the company passes this test.


EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: FAIL

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. CACC's EPS growth rate over the past 6 months (177.60%) has beaten that of the S&P (-13.18%), but CACC's estimated EPS growth for the current year is (-11.63%) while that of the S&P is (32.80%), therefore failing this test.


This methodology would utilize four separate criteria to determine if CACC 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. CACC's P/E of 11.22, based on trailing 12 month earnings, meets the bottom 20% criterion (below 12.73), 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. CACC's P/CF of 10.76 does not meet the bottom 20% criterion (below 6.96), 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. CACC's P/B is currently 4.11, which does not meet the bottom 20% criterion (below 1.08), 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%). CACC's P/D is not available, and hence an opinion cannot be rendered at this time.


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


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 CACC is 0.00%. Unfortunately, its historical payout ratio is not available. Nonetheless it passes the payout criterion, as this is a very low payout.


RETURN ON EQUITY: PASS

The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 17.74%, and would consider anything over 27% to be staggering. The ROE for CACC of 42.07% 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. CACC's pre-tax profit margin is 52.60%, thus passing this criterion.


YIELD: FAIL

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

TOLL BROTHERS INC

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

Toll Brothers, Inc. is engaged in designing, building, marketing, selling and arranging financing for detached and attached homes in luxury residential communities. The Company operates through two segments: Traditional Home Building and Toll Brothers City Living (City Living). Within the Traditional Home Building segment, it operates in five geographic segments in the United States: the North, consisting of Connecticut, Illinois, Massachusetts, Michigan, Minnesota, New Jersey and New York; the Mid-Atlantic, consisting of Delaware, Maryland, Pennsylvania and Virginia; the South, consisting of Florida, North Carolina and Texas; the West, consisting of Arizona, Colorado, Nevada and Washington, and California. City Living is the Company's urban development division. Its products include Traditional Home Building Product and City Living Product. Its Traditional Home Building Product includes detached homes, move-up, executive, estate, and active-adult and age-qualified lines of home.


DETERMINE THE CLASSIFICATION:

TOL is considered a "True Stalwart", according to this methodology, as its earnings growth of 18.73% lies within a moderate 10%-19% range and its annual sales of $6,070 million are greater than the multi billion dollar level. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. TOL is attractive if TOL can hold its own during a recession.


INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for TOL was 142.26% last year, while for this year it is 125.22%. Since inventory to sales has decreased from last year by -17.04%, TOL passes this test.


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

The Yield-adjusted P/E/G ratio for TOL (0.67), based on the average of the 3, 4 and 5 year historical eps growth rates, is O.K.


EARNINGS PER SHARE: PASS

The EPS for a stalwart company must be positive. TOL's EPS ($3.40) would satisfy this criterion.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for TOL (79.16%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for TOL 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 TOL (11.79%) 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 TOL (-39.71%) 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.

MAGNA INTERNATIONAL INC. (USA)

Strategy: Growth Investor
Based on: Martin Zweig

Magna International Inc. (Magna) is a global automotive supplier. The Company's segments are North America, Europe, Asia, Rest of World, and Corporate and Other. The Company's product capabilities include producing body, chassis, exterior, seating, powertrain, electronic, active driver assistance, vision, closure, and roof systems and modules, as well as vehicle engineering and contract manufacturing. The Company has over 320 manufacturing operations and approximately 100 product development, engineering and sales centers in over 30 countries. It provides a range of body, chassis and engineering solutions to its original equipment manufacturer (OEM) customers. It has capabilities in powertrain design, development, testing and manufacturing. It offers bumper fascia systems, exterior trim and modular systems. It offers exterior and interior mirror systems. It offers sealing, trim, engineered glass and module systems. It offers softtops, retractable hardtops, modular tops and hardtops.


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. MGA's P/E is 10.13, based on trailing 12 month earnings, while the current market PE is 28.00. 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. MGA's revenue growth is 3.93%, while it's earnings growth rate is 12.66%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, MGA fails this criterion.


SALES GROWTH RATE: PASS

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (12.3%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (7.3%) of the current year. Sales growth for the prior must be greater than the latter. For MGA 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. MGA's EPS ($1.47) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. MGA's EPS for this quarter last year ($1.24) 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. MGA's growth rate of 18.55% 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 MGA is 6.33%. This should be less than the growth rates for the 3 previous quarters which are 25.41%, 4.96% and 5.43%. MGA 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, 11.48%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 18.55%, (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, 18.55% must be greater than or equal to the historical growth which is 12.66%. MGA 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. MGA, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 3.38, 4.44, 4.72, 5.16 and 5.84, passes this test.


LONG-TERM EPS GROWTH: FAIL

The final important criterion in this approach is that Earnings Growth be at least 15% per year. MGA's long-term growth rate of 12.66%, based on the average of the 3, 4 and 5 year historical eps growth rates, fails the minimum required.


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. MGA's Debt/Equity (31.72%) is not considered high relative to its industry (124.24%) and passes this test.

STAMPS.COM INC.

Strategy: Contrarian Investor
Based on: David Dreman

Stamps.com Inc. is a provider of Internet-based mailing and shipping solutions in the United States. The Company offers mailing and shipping products and services to its customers under the Stamps.com, Endicia, ShipStation, ShipWorks and ShippingEasy brands. It operates through the Internet Mailing and Shipping Services segment. Under the Stamps.com and Endicia brands, customers use its United States Postal Service (USPS) only solutions to mail and ship a range of mail pieces and packages through the USPS. USPS mailing and shipping solutions enable users to print electronic postage directly onto envelopes, plain paper, or labels using only a standard personal computer, printer and Internet connection. The Company offers USPS mailing and shipping services, multi-carrier shipping services, mailing and shipping services, branded insurance and international postage solutions. The Company offers customized postage under the PhotoStamps and PictureItPostage brand names.

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. STMP has a market cap of $3,679 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. STMP's EPS for the past 2 quarters, (from earliest to most recent quarter) 2.49, 2.85 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. STMP passes this test as its EPS growth rate over the past 6 months (66.66%) has beaten that of the S&P (-13.18%). STMP's estimated EPS growth for the current year is (3.03%), which indicates the company is expected to experience positive earnings growth. As a result, STMP passes this test.


This methodology would utilize four separate criteria to determine if STMP 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: FAIL

The P/E of a company should be in the bottom 20% of the overall market. STMP's P/E of 23.61, based on trailing 12 month earnings, is higher than the bottom 20% criterion (below 12.73), and therefore fails 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. STMP's P/CF of 19.88 does not meet the bottom 20% criterion (below 6.96), 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. STMP's P/B is currently 7.40, which does not meet the bottom 20% criterion (below 1.08), 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%). STMP's P/D is not available, and hence an opinion cannot be rendered at this time.


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


CURRENT RATIO: PASS

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.61] or greater than 2). This is one identifier of financially strong companies, according to this methodology. STMP's current ratio of 2.35 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 STMP is 0.00%. Unfortunately, its historical payout ratio is not available. Nonetheless it passes the payout criterion, as this is a very low payout.


RETURN ON EQUITY: PASS

The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 17.74%, and would consider anything over 27% to be staggering. The ROE for STMP of 37.59% 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. STMP's pre-tax profit margin is 34.19%, thus passing this criterion.


YIELD: FAIL

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


LOOK AT THE TOTAL DEBT/EQUITY: PASS

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 62.64%. STMP's Total Debt/Equity of 13.87% is considered acceptable.

FIVE BELOW INC

Strategy: Growth Investor
Based on: Martin Zweig

Five Below, Inc. is a specialty retailer offering a range of merchandise for teen and pre-teen customer. The Company offers an assortment of products, including select brands and licensed merchandise across a range of categories, including Style, Room, Sports, Tech, Crafts, Party, Candy and Now. Its product groups include leisure, fashion and home, and party and snack. Its Leisure includes items, such as sporting goods, games, toys, tech, books, electronic accessories, and arts and crafts. Its Fashion and home includes items, such as personal accessories, attitude t-shirts, beauty offerings, home goods and storage options. Its Party and snack includes items, such as party and seasonal goods, greeting cards, candy and other snacks, and beverages. The Company operated 522 locations across over 31 states throughout the Northeast, South and Midwest regions of the United States, as of January 29, 2017. Its typical store featured 4,000 stock-keeping units (SKUs), as of January 29, 2017.


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. FIVE's P/E is 39.61, based on trailing 12 month earnings, while the current market PE is 28.00. 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. FIVE's revenue growth is 23.72%, while it's earnings growth rate is 30.23%, based on the average of the 3 and 4 year historical eps growth rates. Therefore, FIVE 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 (30.1%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (28.9%) of the current year. Sales growth for the prior must be greater than the latter. For FIVE 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. FIVE's EPS ($1.20) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. FIVE's EPS for this quarter last year ($0.90) 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. FIVE's growth rate of 33.33% 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 FIVE is 15.11%. This should be less than the growth rates for the 3 previous quarters, which are 25.00%, 66.67%, and 80.00%. FIVE 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, 57.50%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 33.33%, (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 FIVE is 33.3%, 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, 33.33% must be greater than or equal to the historical growth which is 30.23%. FIVE 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. FIVE, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.59, 0.88, 1.05, 1.30 and 1.84, 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. FIVE's long-term growth rate of 30.23%, based on the average of the 3 and 4 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. FIVE's Debt/Equity (0.00%) is not considered high relative to its industry (177.24%) 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 FIVE, this criterion has not been met (insider sell transactions are 48, while insiders buying number 62). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.

TRINET GROUP INC

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

TriNet Group, Inc. is a provider of human resources (HR) solutions for small to medium-sized businesses (SMBs). The Company's HR solutions include services, such as multi-state payroll processing and tax administration, employee benefits programs, including health insurance and retirement plans, workers' compensation insurance and claims management, employment and benefit law compliance, and other services. The Company provides an HR technology platform with online and mobile tools that allow its clients and their worksite employees (WSEs) to store, view and manage their HR-related information and conduct a range of HR-related transactions anytime and anywhere. The Company's HR products and solutions include capabilities, such as technology platform, HR expertise, benefits and compliance. The Company's clients are distributed across a range of industries, including technology, life sciences, financial services, property management, retail, manufacturing and hospitality.


PROFIT MARGIN: FAIL

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. TNET's profit margin of 5.44% fails this test.


RELATIVE STRENGTH: PASS

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. TNET, with a relative strength of 91, satisfies this test.


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

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for TNET (187.50% for EPS, and 4.50% for Sales) are not good enough to pass.


INSIDER HOLDINGS: PASS

TNET's insiders should own at least 10% (they own 40.98% ) of the company's outstanding shares which is extremely attractive since the minimum requirement is 10%. A high percentage 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. TNET's free cash flow of $3.01 per share passes this test.


PROFIT MARGIN CONSISTENCY: PASS

TNET's profit margin has been consistent or even increasing over the past three years (Current year: 5.44%, Last year: 2.01%, Two years ago: 1.19%), 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 TNET's case.


CASH AND CASH EQUIVALENTS: FAIL

TNET does not have a sufficiently large amount of cash, $336.00 million, on hand relative to its size. Although this criteria does not apply to companies of this size, we defined anything greater than $500 million in cash as having 'a lot of cash' to allow analysis of these companies. TNET will have more of a difficult time paying off debt (if it has any) or acquiring other companies than a company that passes this criterion.


ACCOUNT RECEIVABLE TO SALES: PASS

This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for TNET was 9.74% last year, while for this year it is 9.68%. Since the AR to sales has been flat, TNET passes this test.


LONG TERM DEBT/EQUITY RATIO: FAIL

TNET's trailing twelve-month Debt/Equity ratio (185.92%) is too high, according to this methodology. You can find other more superior companies that do not have to borrow money in order to grow.


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

The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (TNET's is 0.16), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. TNET passes this test.

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

AVERAGE SHARES OUTSTANDING: PASS

TNET has not been significantly increasing the number of shares outstanding within recent years which is a good sign. TNET currently has 72.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.


SALES: FAIL

Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. TNET's sales of $3,275.0 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years.


DAILY DOLLAR VOLUME: PASS

TNET passes the Daily Dollar Volume (DDV of $18.6 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. TNET with a price of $48.68 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: FAIL

TNET's income tax paid expressed as a percentage of pretax income either this year (11.00%) or last year (41.22%) is below 20% which is cause for concern. Because the tax rate is below 20% this could mean that the earnings that were reported are unrealistically inflated due to the lower level of income tax paid. However, we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%).

ALLIANCE DATA SYSTEMS CORPORATION

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

Alliance Data Systems Corporation is a provider of data-driven marketing and loyalty solutions serving consumer-based businesses in a range of industries. The Company offers a portfolio of integrated outsourced marketing solutions, including customer loyalty programs, database marketing services, end-to-end marketing services, analytics and creative services, direct marketing services, and private label and co-brand retail credit card programs. The Company operates through three segments: LoyaltyOne, which provides coalition and short-term loyalty programs through the Company's Canadian AIR MILES Reward Program and BrandLoyalty Group B.V. (BrandLoyalty); Epsilon, which provides end-to-end, integrated direct marketing solutions, and Card Services, which provides risk management solutions, account origination, funding, transaction processing, customer care, collections and marketing services for the Company's private label and co-brand retail credit card programs.


DETERMINE THE CLASSIFICATION:

ADS is considered a "True Stalwart", according to this methodology, as its earnings growth of 15.77% lies within a moderate 10%-19% range and its annual sales of $7,719 million are greater than the multi billion dollar level. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. ADS is attractive if ADS can hold its own during a recession.


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

The Yield-adjusted P/E/G ratio for ADS (0.96), based on the average of the 3, 4 and 5 year historical eps growth rates, is O.K.


EARNINGS PER SHARE: PASS

The EPS for a stalwart company must be positive. ADS's EPS ($12.96) would satisfy this criterion.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

ADS 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. ADS's Equity/Assets ratio (6.00%) 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. ADS's ROA (2.58%) 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 ADS (19.33%) 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 ADS (-117.30%) 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.

AUTOHOME INC (ADR)

Strategy: Growth Investor
Based on: Martin Zweig

Autohome Inc. is an online destination for automobile consumers in China. The Company is engaged in the provision of online advertising and dealer subscription services in the People's Republic of China (PRC). The Company, through its Websites, autohome.com.cn and che168.com, and mobile applications, delivers content to automobile buyers and owners. These services are offered to automakers and dealers, and advertising agencies that represent automakers and dealers in the automobile industry. The Company's autohome.com.cn targets automobile consumers with a focus on new automobiles. The Company's professionally produced content is created by editorial team and includes automobile-related articles and reviews, pricing trends in various local markets, and photos and video clips. Its database also includes new and used automobile listings and promotional information. Its dealer subscription services allow dealers to market their inventory and services through its Websites.


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. ATHM's P/E is 32.56, based on trailing 12 month earnings, while the current market PE is 28.00. 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. ATHM's revenue growth is 48.64%, while it's earnings growth rate is 42.88%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, ATHM passes this criterion.


SALES GROWTH RATE: PASS

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (30.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-13.1%) of the current year. Sales growth for the prior must be greater than the latter. For ATHM 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. ATHM's EPS ($0.98) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. ATHM's EPS for this quarter last year ($0.44) 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. ATHM's growth rate of 122.73% 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 ATHM is 21.44%. This should be less than the growth rates for the 3 previous quarters, which are 46.81%, 58.33%, and 90.20%. ATHM 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, 66.42%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 122.73%, (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, 122.73% must be greater than or equal to the historical growth which is 42.88%. ATHM 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. ATHM, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.69, 1.05, 1.35, 1.67 and 2.68, 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. ATHM's long-term growth rate of 42.88%, 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. ATHM's Debt/Equity (0.00%) is not considered high relative to its industry (62.47%) and passes this test.

SANDERSON FARMS, INC.

Strategy: Value Investor
Based on: Benjamin Graham

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


SECTOR: PASS

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


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $1 billion. SAFM's sales of $3,425.8 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: PASS

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. SAFM's current ratio of 4.67 passes the test.


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

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for SAFM is $0.0 million, while the net current assets are $644.0 million. SAFM passes this test.


LONG-TERM EPS GROWTH: FAIL

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 10 years. EPS for SAFM were negative within the last 10 years and therefore the company fails this criterion.


P/E RATIO: PASS

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. SAFM's P/E of 11.30 (using the 3 year PE) passes this test.


PRICE/BOOK RATIO: PASS

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. SAFM's Price/Book ratio is 1.75, while the P/E is 11.30. SAFM passes the Price/Book test.


Watch List

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

Ticker Company Name Current
Score
TJX TJX COMPANIES INC 55%
OLLI OLLIE'S BARGAIN OUTLET HOLDINGS INC 47%
SCHN SCHNITZER STEEL INDUSTRIES, INC. 43%
LGIH LGI HOMES INC 42%
PAYC PAYCOM SOFTWARE INC 36%
DHI D. R. HORTON INC 35%
SUPV GRUPO SUPERVIELLE SA -ADR 35%
TREX TREX COMPANY INC 33%
QLYS QUALYS INC 33%
CVS CVS HEALTH CORP 32%



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