Validea Hot List - January 30, 2015

Executive Summary | Portfolio | Guru Analysis | Watch List


Executive Summary	January 30, 2015

The Economy

While there have been a couple bumps in the road, the US economy has by and large continued to show signs of improvement -- very significant improvement, in some areas -- as we make our way deeper into 2015.

New claims for unemployment fell last week to their lowest level since April 2000, for example. They now stand 21.7% below year-ago levels. Continuing claims, the data for which lag new claims by a week, also moved lower since our last newsletter and are 17.8% below year-ago levels.

Manufacturing sector activity increased in December for the 19th straight month, according to the Institute for Supply Management. It did so at a slower rate than it did in November -- the pace was the slowest since June -- but that's more a commentary on just how strong manufacturing activity was in much of the second half of 2014 than it is on December's figure, which was still quite strong. The sub-index for new orders also fell but remained at very high level, while the employment sub-index showed that job growth continues to improve in the sector. Prices, which had been very high over the summer, declined sharply for the third straight month. A big part of that is the sharp drop in oil prices we've seen lately.

The service sector offered a similar story, expanding for the 59th straight month, according to ISM. Both the overall service sector index and the new orders sub-index fell from November but remained at high levels, while job growth in the sector continued at about the same healthy pace that it did a month ago.

New home sales, meanwhile, jumped 11.6% in December, according to the Census Bureau. That put them almost 10% above year-ago levels. Sales prices also rose, with median prices now about 8% above where they were a year ago.

Housing starts also increased, rising 4.4% in December, according to the Census Bureau. They are 8.4% above year-ago levels. Permit issuance for new construction dipped 1.9%, but is about 3.6% above where it stood a year ago.

One main negative report involved nondefense capital goods spending excluding aircraft, which is considered a good gauge of business investment. It dropped 0.6 percent in December, and has now declined in four straight months -- the first time that has happened since 2012. Economists had expected a 0.5% increase, so Wall Street did not take the news well.

Finally, gas and oil prices just keep pushing lower. A gallon of regular unleaded on average cost $2.04 as of Jan. 28, down 26 cents from a month earlier, according to AAA. The oil declines, while a positive for the consumer, are probably one of the reasons behind the durable goods declines, with energy firms cutting back sharply on their capital spending because of the revenue hits they're taking.

Since our last newsletter, the S&P 500 returned 1.4%, while the Hot List returned 7.5%. So far in 2015, the portfolio has returned 4.3% vs. -1.8% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 237.4% vs. the S&P's 102.0% gain.

Portfolio Update

After a subpar 2014, the Hot List has been bouncing back strong in the new year. Since our last newsletter, all ten of the portfolio's holdings are in the black (as of mid-afternoon trading on Jan. 29), with four notching double-digit gains.

Leading the way was Skyworks Solutions, which jumped more than 16%. The firm announced fiscal first quarter revenues of $805.5 million, up 59% from the year-ago period and exceeding previous guidance of $770 million. Diluted earnings per share more than doubled from a year ago, to $1.01 from $0.49. The semiconductor company had several strong developments during the quarter, including capturing new design wins in Cisco's latest home gateway for cable operators, securing multiple analog devices in a leading telematics platform for GM vehicles, and expanding wearable designs with multiple devices in Timex's Ironman smartwatch.

Another semiconductor company -- Silicon Motion Technology -- was up more than 14%. The firm also reported strong earnings, and shares appeared to have been helped by the news that Steven Cohen's Point72 hedge fund upped its stake in the company. Net fourth-quarter sales jumped more than 50% vs. the year-ago period, SIMO said, while diluted earnings per American Depository Share more than doubled.

Other big winners for the fortnight were Universal Insurance Holdings, up 13.2%, and Sasol Ltd., up 10.9%. Hopefully, this strong performance is a sign of good things to come for the Hot List in 2015. In two weeks, we'll rebalance the portfolio and see whether January's winners have what it takes to remain in the Hot List.

Editor-in-Chief: John Reese

Since Inception
Hot List	237.4%
S&P 500	102.0%
Accuracy	54.8%
Beta	1.2

YTD
Hot List	4.3%
S&P 500	-1.8%

Since Last Issue
Hot List	7.5%
S&P 500	1.4%

Avg. Fundamentals
Market Cap (mil)	$11,558
PE Ratio	13.4
5 Yr EPS Growth	24.8%
Yield	2.5%
Rel. Strength	73

Portfolio Sectors
Financial	4
Technology	2
Services	1
Basic Materials	1
Capital Goods	1
Consumer/Non-Cyclical	1

Guru Spotlight: James O'Shaughnessy

James O'Shaughnessy's research into stock investing strategies is among the most comprehensive ever performed. In his What Works on Wall Street, O'Shaughnessy back-tested a myriad of different strategies -- each using different quantitative variables -- to see which have performed best over the long haul. Some of the top performers he found became the basis of the models that drive my Growth/Value Investor portfolio.

O'Shaughnessy also performed extensive research into sector performance, which is what I'd like to focus on today. In the most recent version of his book, he looked at how different sectors had performed over the long term both in terms of raw returns and risk-adjusted returns. In a world in which you can get direct exposure to specific sectors through exchange-traded funds, this is valuable information.

So, what did O'Shaughnessy find? Was it the high-flying tech sector that has led the market over the long haul? The energy sector, which has powered our economy and provided the fuel to spur numerous technological advances? Nope. From 1968 through 2009, O'Shaughnessy found that good ol' boring consumer staples stocks were the best performers. They averaged compound annual returns of 13.6%, beating the next-best sector (financials) by 1.2 percentage points per year. And, staples had the second-lowest standard deviation out of the market's 10 sectors; the only one that was less volatile was utilities. In addition, the most fundamentally sound stocks within the consumer staples sector tended to do even better than the sector as a whole.

"Industries that make goods and services that people have to buy, regardless of economic circumstances, are bound to do well whatever the economic conditions," O'Shaughnessy wrote in his book. In a CNBC interview, he also said many consumer staples firms don't deal with as much competitive challenges as other flashier companies. "There are probably not three guys in a garage out in Palo Alto trying to think up a new formula to beat Coke," he said. "There's all sorts of people out there trying to beat Google."

O'Shaughnessy's research on sectors points to a broader idea: that in investing, sexy companies and stocks more often than not lose out to solid, steady Eddies. Remember, for every Google or Facebook, there are dozens of hyped-up stocks of companies that end up floundering. While most investors are loading up on those high-risk plays, you should consider focusing on stocks of good companies with attractive valuations and solid balance sheets.

On the Validea Professional portion of our website, we track sector portfolios picked using my Guru Strategies. The top sector since these portfolios' 2007 inceptions? You guessed it: consumer staples. (We actually refer to it as "Consumer Non-Cyclical", but it's essentially the same thing.) It has returned 172.7% since inception -- that's 13.2% annualized -- vs. 41.1% (or 4.4% annually) for the S&P 500. Here's a look at its current holdings.

Validea Professional Consumer Non-Cyclical Portfolio (as of Jan. 29, 2015)

News about Validea Hot List Stocks

Sasol Ltd.: Amid the plunge in oil prices, Sasol announced that it has delayed a $14 billion project in southwestern Louisiana to make diesel out of natural gas, The New York Times reported. The project was expected to create at least 1,200 permanent jobs and 7,000 construction jobs. But the project -- described as "highly speculative, and expensive" by the Times, became impractical with the decline in oil prices.

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.


Current Portfolio

Ticker	Company Name	Industry	Guru Score
AFSI	AMTRUST FINANCIAL SERVICES INC	Insurance (Prop. & Casualty)	100
SAFM	SANDERSON FARMS, INC.	Food Processing	74
ZUMZ	ZUMIEZ INC.	Retail (Apparel)	57
AGCO	AGCO CORPORATION	Constr. & Agric. Machinery	55
SSL	SASOL LIMITED (ADR)	Chemical Manufacturing	45
STWD	STARWOOD PROPERTY TRUST, INC.	Consumer Financial Services	39
UVE	UNIVERSAL INSURANCE HOLDINGS, INC.	Insurance (Prop. & Casualty)	36
SWKS	SKYWORKS SOLUTIONS INC	Semiconductors	35
SIMO	SILICON MOTION TECHNOLOGY CORP. (ADR)	Semiconductors	25
BLK	BLACKROCK, INC.	Investment Services	0

Ticker	Market Cap	Date Added	Start Price	Current Price	Return
AFSI	$4,219	10/24/2014	$49.37	$52.25	5.8%
SAFM	$1,910	1/16/2015	$80.96	$82.50	1.9%
ZUMZ	$1,137	10/24/2014	$32.97	$38.90	18.0%
AGCO	$4,014	12/20/2013	$57.62	$43.64	-24.3%
SSL	$23,203	12/19/2014	$38.95	$36.02	-7.5%
STWD	$5,349	1/16/2015	$23.72	$24.05	1.4%
UVE	$827	11/21/2014	$19.30	$24.15	25.1%
SWKS	$16,051	1/16/2015	$73.85	$84.19	14.0%
SIMO	$955	12/19/2014	$24.09	$28.32	17.6%
BLK	$57,912	12/19/2014	$360.15	$346.94	-3.7%


Detailed Stock 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

AMTRUST FINANCIAL SERVICES INC

Profile

Strategy: Patient Investor
Based on: Warren Buffett

Amtrust Financial Services, Inc., (AmTrust) is a provider of property and casualty insurance. The Company operates in four business segments: small commercial business, Specialty Risk and Extended Warranty, specialty program and personal lines reinsurance. Small Commercial Business segment provides workers' compensation to small businesses. The Company's Specialty Risk and Extended Warranty segment provides coverage for consumer and commercial goods and custom designed coverages. The Company's Specialty Program segment provides workers' compensation, package products, general liability, commercial auto liability, excess and surplus lines programs and other specialty commercial property and casualty insurance. The Company subsidiaries include: Technology Insurance Company, Inc. (TIC), Rochdale Insurance Company (RIC), AmTrust Insurance Company of Kansas, Inc. (AICK), AmTrust Lloyd's Insurance Company of Texas (ALIC), Oryx Insurance Brokerage, Inc. and TMI Solutions, LLC.

Analysis

Guru Score: 77%

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

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

LOOK FOR EARNINGS PREDICTABILITY: [PASS]

Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.11, 0.73, 0.78, 1.35, 1.24, 1.56, 1.95, 2.29, 2.34, 3.67. Buffett would consider AFSI's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 6 years ago. The dips have totaled 8.1%. AFSI's long term historical EPS growth rate is 23.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 15.0% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers.

LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [FAIL]

Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for AFSI, over the last ten years, is 19.2%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 6.1%, 40.6%, 15.2%, 22.8%, 20.9%, 17.9%, 17.8%, 17.0%, 15.1%, 19.1%, and the average ROE over the last 3 years is 17.1%, thus failing this criterion.

LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON ASSETS: [PASS]

Buffett also requires, for financial companies, that the average Return On Assets (ROA) be at least 1% and consistent. Return On Assets is defined as the net earnings of the business divided by the total assets of the business. The average ROA for AFSI, over the last ten years, is 3.3%, which is high enough to pass. It is not enough that the average be at least 1%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROA must be at least 1% for Buffett to feel comfortable that the ROA is consistent. The ROA for the last 10 years, from earliest to latest, is 1.4%, 7.8%, 4.2%, 3.8%, 2.6%, 3.0%, 3.1%, 2.6%, 2.3%, 2.4%, thus passing this criterion.

LOOK AT CAPITAL EXPENDITURES: [PASS]

Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. AFSI's free cash flow per share of $10.80 is positive, indicating that the company is generating more cash that it is consuming. This is a favorable sign, and so the company passes this criterion.

LOOK AT MANAGEMENT'S USE OF RETAINED EARNINGS: [PASS]

Buffett likes to see if management has spent retained earnings in a way that benefits shareholders. To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $14.19 and compares it to the gain in EPS over the same period of $3.56. AFSI's management has proven it can earn shareholders a 25.1% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work.

HAS THE COMPANY BEEN BUYING BACK SHARES: [NEUTRAL]

Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. AFSI's shares outstanding have not fallen in either the current year or the last 3 or 5 years and so it fails this criterion. This is a bonus criterion and will not adversely affect the ability of a stock to pass the strategy as a whole if it is failed.

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

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

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

Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $5.39 and divide it by the current market price of $52.25. An investor, purchasing AFSI, could expect to receive a 10.32% initial rate of return. Furthermore, he or she could expect the rate to increase 15.0% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing.

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

Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 2.75%. Compare this with AFSI's initial yield of 10.32%, which will expand at an annual rate of 15.0%, based on the analysts' consensus estimated long term growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding.

CALCULATE THE FUTURE EPS: [No Pass/Fail]

AFSI currently has a book value of $22.52. It is safe to say that if AFSI can preserve its average rate of return on equity of 17.1% and continues to retain 89.50% of its earnings, it will be able to sustain an earnings growth rate of 15.3% and it will have a book value of $93.27 in ten years. If it can still earn 17.1% on equity in ten years, then expected EPS will be $15.91.

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

Now take the expected future EPS of $15.91 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (9.7) (5 year average P/E in this case), which is 8.7 and you get AFSI's projected future stock price of $138.11.

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

Now add in the total expected dividend pool to be paid over the next ten years, which is $13.21. This gives you a total dollar amount of $151.32. These numbers indicate that one could expect to make a 11.2% average annual return on AFSI's stock at the present time. The return is unacceptable to Buffett.

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

If you take the EPS growth of 15.0%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $21.81. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (9.7) (5 year average P/E in this case), which is 8.7. This equals the future stock price of $189.27. Add in the total expected dividend pool of $13.21 to get a total dollar amount of $202.48.

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

Now you can figure out your expected return based on a current price of $52.25 and the future expected stock price, including the dividend pool, of $202.48. If you were to invest in AFSI at this time, you could expect a 14.51% average annual return on your money. Buffett likes to see a 15% return, but nonetheless would accept this return.

LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [PASS]

Based on the two different methods, you could expect an annual compounding rate of return somewhere between 11.2% and 14.5%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 12.9% on AFSI stock for the next ten years, based on the current fundamentals. Buffett likes to see a 15% return, but nonetheless would accept this return, thus passing the criterion.

SANDERSON FARMS, INC.

Profile

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

Sanderson Farms, Inc. is a poultry processing company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products. In addition, the Company is engaged in the processing, marketing and distribution of prepared chicken through its wholly owned subsidiary, Sanderson Farms, Inc. (Foods Division). It sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, under the Sanderson Farms brand name to retailers, distributors, and casual dining operators in the south-eastern, south-western, north-eastern and western United States and to customers who resell frozen chicken into export markets. During the fiscal year ended October 31, 2013 (fiscal 2013), it processed 434 million chickens, or over 3.0 billion dressed pounds.

Analysis

Guru Score: 100%

PRICE/SALES RATIO: [PASS]

The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. SAFM's P/S of 0.69 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors.

TOTAL DEBT/EQUITY RATIO: [PASS]

Less debt equals less risk according to this methodology. SAFM's Debt/Equity of 2.23% is acceptable, thus passing the test.

PRICE/RESEARCH RATIO: [PASS]

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

PRELIMINARY GRADE: Some Interest in SAFM At this Point
Is SAFM a "Super Stock"? YES

PRICE/SALES RATIO: [PASS]

The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.SAFM's P/S ratio of 0.69 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors.

LONG-TERM EPS GROWTH RATE: [PASS]

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. SAFM's inflation adjusted EPS growth rate of 16.60% passes the test.

FREE CASH PER SHARE: [PASS]

This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. SAFM's free cash per share of 4.65 passes this criterion.

THREE YEAR AVERAGE NET PROFIT MARGIN: [PASS]

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. SAFM, whose three year net profit margin averages 5.37%, passes this evaluation.

ZUMIEZ INC.

Profile

Strategy: Growth Investor
Based on: Martin Zweig

Zumiez Inc. (Zumiez) is a specialty retailer of action sports related apparel, footwear, equipment and accessories operating under the Zumiez brand name. As of January 28, 2012, the Company operated 434 stores in the United States and 10 stores in Canada. In addition, the Company operates a Website that sells merchandise online. At January 28, 2012, its stores averaged approximately 2,900 square feet. Its apparel offerings include tops, bottoms, outerwear and accessories, such as caps, bags and backpacks, belts, jewelry and sunglasses. Zumiez's footwear offerings primarily consist of action sports related athletic shoes and sandals. Its equipment offerings, or hardgoods, include skateboards, snowboards and ancillary gear, such as boots and bindings. The Company also offers a selection of other items, such as miscellaneous novelties.

Analysis

Guru Score: 77%

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. ZUMZ's P/E is 21.93, based on trailing 12 month earnings, while the current market PE is 17.00. 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. ZUMZ's revenue growth is 14.07%, while it's earnings growth rate is 31.79%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, ZUMZ fails this criterion.

SALES GROWTH RATE: [FAIL]

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (11.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (11.9%) of the current year. Sales growth for the prior must be greater than the latter. For ZUMZ this criterion has not been met and fails this test.

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

CURRENT QUARTER EARNINGS: [PASS]

The first of these criteria is that the current EPS be positive. ZUMZ's EPS ($0.54) pass this test.

QUARTERLY EARNINGS ONE YEAR AGO: [PASS]

The EPS for the quarter one year ago must be positive. ZUMZ's EPS for this quarter last year ($0.39) 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. ZUMZ's growth rate of 38.46% 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 ZUMZ is 15.90%. This should be less than the growth rates for the 3 previous quarters which are 20.27%, 0.00% and 62.50%. ZUMZ 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, 25.51%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 38.46%, (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, 38.46% must be greater than or equal to the historical growth which is 31.79%. ZUMZ 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. ZUMZ, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.30, 0.79, 1.20, 1.35 and 1.52, 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. ZUMZ's long-term growth rate of 31.79%, 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. ZUMZ's Debt/Equity (0.00%) is not considered high relative to its industry (36.13%) 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 ZUMZ, this criterion has not been met (insider sell transactions are 69, while insiders buying number 39). 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.

AGCO CORPORATION

Profile

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

AGCO Corporation is engaged in manufacturing and distributing agricultural equipment and related replacement parts throughout the world. The Company sells a range of agricultural equipment, including tractors, combines, self-propelled sprayers, application equipment, hay tools, forage equipment, tillage, implements, engines, precision farming technologies, grain storage and protein production systems, and replacement parts. Its products are used in the agricultural equipment industry and are marketed under a number of brands, including Challenger, Fendt, GSI, Massey Ferguson and Valtra. The Company distributes most of its products through a combination of approximately 3,100 independent dealers and distributors in more than 140 countries. In addition, the Company provides retail financing, through its retail finance joint ventures with Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank).

Analysis

Guru Score: 100%

PRICE/SALES RATIO: [PASS]

The prospective company should have a low Price/Sales ratio. Cyclical companies with Price/Sales ratios below or equal to .4 are tremendous values and should be sought. AGCO's P/S ratio of 0.40 based on trailing 12 month sales, is below .4 which is considered very favorable. 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. AGCO's Debt/Equity of 37.80% is acceptable, thus passing the test.

PRICE/RESEARCH RATIO: [PASS]

This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. AGCO 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 AGCO At this Point
Is AGCO a "Super Stock"? YES

PRICE/SALES RATIO: [PASS]

The prospective company should have a low Price/Sales ratio. Cyclical companies with Price/Sales ratios below .4 are tremendous values and should be sought. AGCO's P/S ratio of 0.40 is below 0.4 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors.

LONG-TERM EPS GROWTH RATE: [PASS]

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. AGCO's inflation adjusted EPS growth rate of 27.41% passes the test.

FREE CASH PER SHARE: [PASS]

This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. AGCO's free cash per share of 3.68 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. AGCO, whose three year net profit margin averages 5.81%, passes this evaluation.

SASOL LIMITED (ADR)

Profile

Strategy: Patient Investor
Based on: Warren Buffett

Sasol Limited (Sasol) is an integrated energy and chemicals company. Sasol mines coal in South Africa and produce natural gas and condensate in Mozambique, oil in Gabon and shale gas in Canada. In South Africa it refines imported crude oil and retail liquid fuels. It has chemical manufacturing and marketing operations in South Africa, Europe, the Middle East, Asia and the Americas. It operates in four segments: South African energy cluster, International Energy Cluster, Chemical Cluster and Other businesses. Effective March 31, 2013, Sasol Olefins & Surfactants sold G.D. Portbury Ltd. On 16 August 2013, Sasol Investment Company (Pty) Limited, a wholly owned subsidiary of Sasol, entered into a definitive sale and share purchase agreement pursuant to which Main Street 1095 (Pty) Limited, completed the acquisition of 100% of the interest of SPI International (Pty) Limited (SPII). SPII is the indirect owner of a 50% interest in the Iranian joint venture, Arya Sasol Polymer Company.

Analysis

Guru Score: 86%

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

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

LOOK FOR EARNINGS PREDICTABILITY: [PASS]

Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 1.35, 1.43, 2.34, 3.18, 1.92, 2.30, 2.84, 3.31, 3.70, 4.18. Buffett would consider SSL's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 6 years ago. The dips have totaled 39.6%. SSL's long term historical EPS growth rate is 15.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 1.9% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers.

LOOK AT THE ABILITY TO PAY OFF DEBT [PASS]

Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. SSL has a debt of 2,029.1 million and earnings of 2,603.8 million, which could be used to pay off the debt in less than two years, which is considered exceptional.

LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [PASS]

Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for SSL, over the last ten years, is 21.1%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 23.6%, 19.6%, 26.9%, 30.0%, 17.4%, 17.8%, 19.4%, 19.4%, 18.8%, 18.4%, and the average ROE over the last 3 years is 18.9%, thus passing this criterion.

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

Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for SSL, over the last ten years, is 17.8% and the average ROTC over the past 3 years is 16.8%, which is high enough to pass. It is not enough that the average be at least 12%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROTC must be at least 9% for Buffett to feel comfortable that the ROTC is consistent. The ROTC for the last 10 years, from earliest to latest, is 18.1%, 15.2%, 22.1%, 24.9%, 15.0%, 15.5%, 17.1%, 17.8%, 16.5%, 16.2%, thus passing this criterion.

LOOK AT CAPITAL EXPENDITURES: [PASS]

Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. SSL's free cash flow per share of $0.72 is positive, indicating that the company is generating more cash that it is consuming. This is a favorable sign, and so the company passes this criterion.

LOOK AT MANAGEMENT'S USE OF RETAINED EARNINGS: [PASS]

Buffett likes to see if management has spent retained earnings in a way that benefits shareholders. To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $15.92 and compares it to the gain in EPS over the same period of $2.83. SSL's management has proven it can earn shareholders a 17.8% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work.

HAS THE COMPANY BEEN BUYING BACK SHARES: [BONUS PASS]

Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. SSL's shares outstanding have fallen over the past three years from 636,020,020 to 632,000,000, thus passing this criterion. This is a bonus criterion and will not adversely affect the ability of a stock to pass the strategy as a whole if it is failed.

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

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

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

Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $4.12 and divide it by the current market price of $36.02. An investor, purchasing SSL, could expect to receive a 11.44% initial rate of return. Furthermore, he or she could expect the rate to increase 1.9% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing.

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

Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 2.75%. Compare this with SSL's initial yield of 11.44%, which will expand at an annual rate of 1.9%, based on the analysts' consensus estimated long term growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding.

CALCULATE THE FUTURE EPS: [No Pass/Fail]

SSL currently has a book value of $21.70. It is safe to say that if SSL can preserve its average rate of return on equity of 18.9% and continues to retain 58.23% of its earnings, it will be able to sustain an earnings growth rate of 11.0% and it will have a book value of $61.54 in ten years. If it can still earn 18.9% on equity in ten years, then expected EPS will be $11.61.

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

Now take the expected future EPS of $11.61 and multiply them by the lower of the 5 year average P/E ratio (10.8) or current P/E ratio (current P/E in this case), which is 8.8 and you get SSL's projected future stock price of $101.84.

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

Now add in the total expected dividend pool to be paid over the next ten years, which is $19.12. This gives you a total dollar amount of $120.96. These numbers indicate that one could expect to make a 12.9% average annual return on SSL's stock at the present time. Although, the return is slightly below the liking of Buffett, the return would still be somewhat acceptable.

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

If you take the EPS growth of 1.9%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $4.97. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (10.8) or current P/E ratio (current P/E in this case), which is 8.8. This equals the future stock price of $43.62. Add in the total expected dividend pool of $19.12 to get a total dollar amount of $62.73.

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

Now you can figure out your expected return based on a current price of $36.02 and the future expected stock price, including the dividend pool, of $62.73. If you were to invest in SSL at this time, you could expect a 5.70% average annual return on your money. Buffett likes to see a 15% return, and would even go down to 12%.

LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [FAIL]

Based on the two different methods, you could expect an annual compounding rate of return somewhere between 5.7% and 12.9%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 9.3% on SSL stock for the next ten years, based on the current fundamentals. Buffett accepts a 12% return, although 15% is preferable. This return is unacceptable to Buffett, thus failing the criterion.

STARWOOD PROPERTY TRUST, INC.

Profile

Strategy: Contrarian Investor
Based on: David Dreman

Starwood Property Trust, Inc. is a holding company and conducts its business through its subsidiaries. The Company is focused on originating, investing in, financing and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities (CMBS), and other commercial real estate-related debt investments. In addition, it also invests in residential mortgage loans and residential mortgage-backed securities (RMBS). It makes certain investments in RMBS, which it uses as an alternative investment for its available cash. In April 2013, Starwood Property Trust Inc acquired LNR Property LLC from Vornado Realty Trust, iStar Financial Inc (24%), Cerebrus, and Oaktree Capital Management LP. In February 2014, Starwood Property Trust, Inc. spun off Starwood Waypoint Residential Trust.

Analysis

Guru Score: 90%

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. STWD has a market cap of $5,349 million, therefore passing the test.

EARNINGS TREND: [PASS]

A company should show a rising trend in the reported earnings for the most recent quarters. STWD's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.52, 0.73 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. STWD passes this test as its EPS growth rate over the past 6 months (30.35%) has beaten that of the S&P (6.22%). STWD's estimated EPS growth for the current year is (19.34%), which indicates the company is expected to experience positive earnings growth. As a result, STWD passes this test.

This methodology would utilize four separate criteria to determine if STWD 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. STWD's P/E of 10.57, based on trailing 12 month earnings, meets the bottom 20% criterion (below 11.78), 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. STWD's P/CF of 10.23 does not meet the bottom 20% criterion (below 6.71), 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. STWD's P/B is currently 1.39, which does not meet the bottom 20% criterion (below 0.95), and it therefore fails this test.

PRICE/DIVIDEND (P/D) RATIO: [PASS]

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%). STWD's P/D of 12.53 meets the bottom 20% criterion (below 20.28), and it therefore passes this test.

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

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 STWD is 81.89%, while its historical payout ratio has been 87.57%. Therefore, it passes the payout criterion.

RETURN ON EQUITY: [FAIL]

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 largest cap stocks, which is 17.18%, and would consider anything over 27% to be staggering. The ROE for STWD of 12.08% is not 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. STWD's pre-tax profit margin is 72.22%, thus passing this criterion.

YIELD: [PASS]

The company in question should have a yield that is high and that can be maintained or increased. STWD's current yield is 7.98%, while the market yield is 2.68%. STWD passes this test.

UNIVERSAL INSURANCE HOLDINGS, INC.

Profile

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

Universal Insurance Holdings, Inc. (UIH) is a vertically integrated insurance company. The Company's insurance products are offered to the Company's customers through Universal Property & Casualty Insurance Company (UPCIC) and American Platinum Property and Casualty Insurance Company (APPCIC), (collectively the Insurance Entities). Substantially all aspects of insurance underwriting, distribution and claims processing are covered through the Company's subsidiaries. Blue Atlantic Reinsurance Corporation (BARC), a wholly owned subsidiary of UIH, is a reinsurance intermediary broker. The Insurance Entities generate revenues primarily from the collection of premiums. Universal Risk Advisors, Inc. (URA), the Company's managing general agent, generates revenue through policy fee income and other administrative fees from the marketing of the Insurance Entities' insurance products through its distribution network of independent agents.

Analysis

Guru Score: 72%

DETERMINE THE CLASSIFICATION:

UVE is considered a "Stalwart", according to this methodology, for its earnings growth of 16.77%. This is based on based on the average of the 3, 4 and 5 year historical eps growth rates, which lies within a moderate 10%-19% range. 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. However, UVE is not considered a "True Stalwart" for its sales of $342 million are less than the multi-billion dollar level.

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

The Yield-adjusted P/E/G ratio for UVE (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. UVE's EPS ($1.91) would satisfy this criterion.

TOTAL DEBT/EQUITY RATIO: [NEUTRAL]

UVE 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. UVE's Equity/Assets ratio (20.00%) 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. UVE's ROA (7.07%) is above the minimum 1% that this methodology looks for, thus passing the criterion.

FREE CASH FLOW: [NEUTRAL]

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for UVE (15.11%) 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 UVE (-3.10%) 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.

SKYWORKS SOLUTIONS INC

Profile

Strategy: Growth Investor
Based on: Martin Zweig

Skyworks Solutions, Inc. (Skyworks) is a producer of analog semiconductors. The Company offers custom linear products automotive, broadband, cellular infrastructure, energy management, global positioning system (GPS), industrial, medical, military, wireless networking, smartphone and tablet applications. Its portfolio consists of amplifiers, attenuators, battery chargers, circuRobotors, demoduRobotors, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isoRobotors, light emitting diode (LED) drivers, mixers, moduRobotors, optocouplers, optoisoRobotors, phase shifters, phase locked loops (PLLs)/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches, voltage reguRobotors and technical ceramics. Its customers include Cisco, Ericsson, Foxconn, Fujitsu, General Electric, Google, Honeywell, LG Electronics, Nest, Netgear, Nokia, Northrop Grumman, Rockwell Collins, Samsung, Sensus and ZTE.

Analysis

Guru Score: 85%

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. SWKS's P/E is 29.15, based on trailing 12 month earnings, while the current market PE is 17.00. 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. SWKS's revenue growth is 20.47%, while it's earnings growth rate is 30.91%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, SWKS 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 (59.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (50.6%) of the current year. Sales growth for the prior must be greater than the latter. For SWKS 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. SWKS's EPS ($1.00) pass this test.

QUARTERLY EARNINGS ONE YEAR AGO: [PASS]

The EPS for the quarter one year ago must be positive. SWKS's EPS for this quarter last year ($0.49) 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. SWKS's growth rate of 104.08% 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 SWKS is 15.45%. This should be less than the growth rates for the 3 previous quarters, which are 25.00%, 70.59%, and 104.55%. SWKS 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, 70.91%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 104.08%, (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, 104.08% must be greater than or equal to the historical growth which is 30.91%. SWKS 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. SWKS, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.75, 1.19, 1.05, 1.45, and 2.38, 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. SWKS's long-term growth rate of 30.91%, 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. SWKS's Debt/Equity (0.00%) is not considered high relative to its industry (34.61%) 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 SWKS, this criterion has not been met (insider sell transactions are 523, while insiders buying number 190). 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.

SILICON MOTION TECHNOLOGY CORP. (ADR)

Profile

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

Silicon Motion Technology Corporation is a Taiwan-based holding company. The Company develops microcontroller ICs for NAND flash storage devices and specialty RF ICs for mobile devices. The Company designs, develops and markets, low-power semiconductor solutions to OEMs and other customers in the mobile storage and mobile communications markets. For the mobile storage market, the Company's key products are microcontrollers used in solid state storage devices such as SSDs, eMMCs and other embedded flash applications, as well as removable storage products. For the mobile communications market, the Company's key products are handset transceivers and mobile TV IC solutions. The Company's products are used in smartphones, tablets, and industrial and commercial applications.

Analysis

Guru Score: 83%

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. SIMO's profit margin of 14.47% passes 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. SIMO, 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 SIMO (-446.94% for EPS, and -171.94% for Sales) are not good enough to pass.

INSIDER HOLDINGS: [PASS]

SIMO's insiders should own at least 10% (they own 11.33% ) 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. SIMO's free cash flow of $1.96 per share passes this test.

PROFIT MARGIN CONSISTENCY: [FAIL]

The profit margin in the past must be consistently increasing. The profit margin of SIMO has been inconsistent in the past three years (Current year: 12.15%, Last year: 16.78%, Two years ago: 21.10%), which is unacceptable. This inconsistency will carryover directly to the company's bottom line, or earnings per share.

R&D AS A PERCENTAGE OF SALES: [PASS]

SIMO is either maintaining the same levels of R&D expenditures(currently $46.5 million) or increasing these levels which is a good sign. This allows the company to develop the superior technology and new products that will put everyone else out of business. This criterion is particularly important for high-tech and medical stocks because they are so R&D dependant.

CASH AND CASH EQUIVALENTS: [PASS]

SIMO's level of cash $162.5 million passes this criteria. If a company is a cash generator, like SIMO, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.

INVENTORY TO SALES: [PASS]

This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for SIMO was 11.42% last year, while for this year it is 14.94%. Although the inventory to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive.

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 SIMO was 13.07% last year, while for this year it is 13.74%. Although the AR to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive.

LONG TERM DEBT/EQUITY RATIO: [PASS]

SIMO's trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don't need 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 (SIMO's is 0.10), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. SIMO passes this test.

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

AVERAGE SHARES OUTSTANDING: [FAIL]

SIMO has either issued a significant amount of new shares over the past year or has been issuing more and more shares over the past five years. SIMO currently has 9.0 million shares outstanding. Neither of these are a good sign. Generally when a small-cap company issues more stock, the existing stock becomes devalued by the market, and hence diluted.

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. SIMO's sales of $261.3 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". SIMO passes the sales test.

DAILY DOLLAR VOLUME: [PASS]

SIMO passes the Daily Dollar Volume (DDV of $13.7 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. SIMO with a price of $28.32 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]

SIMO's income tax paid expressed as a percentage of pretax income either this year (26.30%) or last year (13.11%) 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%).

BLACKROCK, INC.

Profile

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

BlackRock, Inc. (BlackRock) is an investment management firm. The Company provides a range of investment and risks management services. The Company's clients include retail, high net worth (HNW) and institutional investors, consists of pension funds, official institutions, endowments, insurance companies, corporations, financial institutions, central banks and sovereign wealth funds. The Company's platform enables the Company to offer active (alpha) investments with index (beta) products and risk management to develop tailored solutions for clients. Its product range includes single- and multi-asset class portfolios investing in equities, fixed income, alternatives and/or money market instruments. In October 2013, BlackRock Inc acquired Macquarie Global Property Advisors Ltd. In January 2014, Forge Group Limited announced that BlackRock Inc. and subsidiaries had ceased to be the substantial holder of Forge Group Limited.

Analysis

Guru Score: 91%

DETERMINE THE CLASSIFICATION:

BLK is considered a "True Stalwart", according to this methodology, as its earnings growth of 19.23% lies within a moderate 10%-19% range and its annual sales of $11,081 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. BLK is attractive if BLK can hold its own during a recession.

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

The Yield-adjusted P/E/G ratio for BLK (0.83), 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. BLK's EPS ($19.30) would satisfy this criterion.

TOTAL DEBT/EQUITY RATIO: [NEUTRAL]

BLK 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. BLK's Equity/Assets ratio (12.00%) is healthy and above the minimum 5% this methodology looks for, thus passing the criterion.

RETURN ON ASSETS: [PASS]

This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. BLK's ROA (1.28%) is above the minimum 1% that this methodology looks for, thus passing the criterion.


Watch List

The Watch List contains the highest scoring stocks according to our guru consensus system that are not currently in the Hot List portfolio. We provide this list both for informational purposes and for investors who are not comfortable with a portfolio of ten stocks.

Ticker	Company Name	Industry	Guru Score
VLO	VALERO ENERGY CORPORATION	Oil & Gas Operations	67
AAPL	APPLE INC.	Communications Equipment	62
PII	POLARIS INDUSTRIES INC.	Recreational Products	39
MNST	MONSTER BEVERAGE CORP	Beverages (Non-Alcoholic)	39
USNA	USANA HEALTH SCIENCES, INC.	Conglomerates	37
AXS	AXIS CAPITAL HOLDINGS LIMITED	Insurance (Prop. & Casualty)	37
OVTI	OMNIVISION TECHNOLOGIES, INC.	Semiconductors	36
HIBB	HIBBETT SPORTS, INC.	Retail (Specialty)	36
HP	HELMERICH & PAYNE, INC.	Oil Well Services & Equipment	35
TASR	TASER INTERNATIONAL, INC.	Electronic Instr. & Controls	34


Disclaimer

The names of individuals (i.e., the 'gurus') appearing in this report are for identification purposes of his methodology only, as derived by Validea.com from published sources, and are not intended to suggest or imply any affiliation with or endorsement or even agreement with this report personally by such gurus, or any knowledge or approval by such persons of the content of this report. All trademarks, service marks and tradenames appearing in this report are the property of their respective owners, and are likewise used for identification purposes only.

Validea is not registered as a securities broker-dealer or investment advisor either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. Validea is not responsible for trades executed by users of this site based on the information included herein. The information presented on this website does not represent a recommendation to buy or sell stocks or any financial instrument nor is it intended as an endorsement of any security or investment. The information on this website is generic by nature and is not personalized to the specific situation of any individual. The user therefore bears complete responsibility for their own investment research and should seek the advice of a qualified investment professional prior to making any investment decisions.

Performance results are based on model portfolios and do not reflect actual trading. Actual performance will vary based on a variety of factors, including market conditions and trading costs. Past performance is not necessarily indicative of future results. Individual stocks mentioned throughout this web site may be holdings in the managed portfolios of Validea Capital Management, a separate asset management firm founded by Validea.com founder John Reese. Validea Capital Management, which is a separate legal entity and an SEC registered investment advisory firm, uses, in part, the strategies on the web site to select stocks for its clients.