Economy & Markets

News about a trade deal with China could unleash a stock rally, though the markets have waited for word of an agreement for weeks without getting a clear answer. By Thursday, traders were awaiting the outcome of a meeting between President Trump and top Chinese officials in Washington. Both sides have slapped tariffs on billions of dollars of goods, and a deal that could end the impasse would be viewed as positive for stocks. The expectation for a deal has already pushed the S&P 500 to a 14% rally this year, after a dismal December. The Federal Reserve's decision to stop raising rates this year has also lit a fire under stocks, particularly growth-oriented tech shares. The market gains come amid some data that show a softening economy, though some of it reflects a weaker comparison to last year, when the full effects of tax cuts factored into the numbers. The S&P is trading at a multiple of 17 times forward earnings, while the Dow Jones Industrial Average has a P/E of 15.9. In addition to tech, shares of consumer discretionary, real estate and utilities are leading the market higher, while shares of energy and financials lag.

Some numbers to watch :

1. Job cuts are their highest in a decade, jumping more than 35% in the first quarter compared to last year, according to Challenger, Gray & Christmas. And growth in private payrolls fell nearly 50,000 short of expectations.

2. Growth in the services sector is slowing, with the ISM non-manufacturing index falling to 56.1 in March, the weakest showing since 2017.

3. New orders for U.S.-made capital goods fell unexpectedly in February while shipments remained unchanged.

4. Retail sales in the U.S. fell 0.2% in February as households cut spending on furniture, clothing, food and electronics, according to the Commerce Department.

5. Auto sales are projected to slow to the lowest level in four years, according to JD Power, which projects annual sales in the first quarter to fall to 16.7 million.

Recommended Reading

ETFs have been one of the hottest investments in the last few years but Bloomberg's Barry Ritholtz argues in a recent article that new issues have to struggle mightily to survive. To attract capital needed to survive amid all the competition, he says ETFs need to have a catchy marketing approach. He gathered this insight while talking to industry professionals at the Inside ETFs conference in February. Bloomberg Intelligence data shows that, over the past five years, 1,050 ETFs have launched and during the same period, more than 900 have folded. Their average lifespan is 3.4 years, Ritholtz notes. Funds with easy to remember ticker symbols have higher valuations, interestingly. Read more here and check below for links to other blog posts and articles you may have missed.

Big Defense: Forbes contributor Marc Gerstein wrote a defense of stock picking, saying there are advantages to screening stocks based on some objective showing of merit. His column was a response to a story he says attacked stock picking as a viable strategy. Read more

Mandel Leaving: Barron's reports that Steve Mandel-"the most successful fundamental stock picker of them all"-stepped down as portfolio manager of Lone Pine Capital in January.

The article includes praise from Mandel's peers, including Seth Klarman and Paul Tudor Jones. Read more

Bubble thinking: James O'Shaughnessy tells the Off the Chain podcast that he doesn't know enough about cryptocurrency to be a bull or a bear on it. The category has seen tremendous volatility as investors pushed prices of bitcoin and other digital currencies to dizzying heights only to crash. O'Shaughnessy says fear, greed and hope have wiped out more wealth than anything else. Read more

Shiller Views: At the Inside ETFs conference in Florida last month, Yale professor and Nobel laureate Robert Shiller talked about an impending recession, the threat of nuclear war and the importance of human narratives, according to Advisor Perspectives. Read more

Vinik Returns: Former Fidelity Magellan fund manager Jeffrey Vinik said he's resurrecting the hedge fund he closed in 2013, but not just to compete with the market and other managers, according to Bloomberg. Read more

Munger's Faves: Li Lu, the founder of Himalaya Capital, is the only person other than Warren Buffett that Charlie Munger trusts with his money. Munger said this during the annual meeting of The Daily Journal in February. He and others have called Li the "Chinese version of Warren Buffett." Read more

Debt Avalanche: MarketWatch says the mountain of corporate debt coming due by 2023-$3.3 trillion, representing 48% of all current outstanding commercial debt-could spell a bumpy road ahead for the stock market. Read more

Size Benefits: Managers of the $20 million Netherlands-based Plethora Precious Metals Fund say that the "key to getting monster-sized returns in mining equities is to be small," according to Bloomberg. Read more

Transaction Costs: CFA Institute recently ran an article that reported research about the benefits of smart beta strategies largely ignores transaction costs that reduce returns significantly. "Creating factor portfolios in academia is "very different from building investable smart beta exchange-traded funds (ETFs)." Read more

Ditching Funds: Barron's recently asked the question whether investors should quit a fund when a star manager leaves, using the example of Henry Ellenbogen's departure from T. Rowe Price at the end of this month. Read more

Best Ideas: A Vanguard study contradicts the idea that broadly diversified portfolios are inferior to concentrated portfolios made up of a manager's best ideas. It says the premise reflected hindsight bias. Read more


The Fallen

As we rebalance the Validea Hot List, 3 stocks leave our portfolio. These include: Essent Group Ltd (ESNT), Cbre Group Inc (CBRE) and Monster Beverage Corp (MNST).

The Keepers

7 stocks remain in the portfolio. They are: Insight Enterprises, Inc. (NSIT), Bruker Corporation (BRKR), Royal Dutch Shell Plc (Adr) (RDS.A), Mastercard Inc (MA), Discover Financial Services (DFS), Insperity Inc (NSP) and Lpl Financial Holdings Inc (LPLA).

The New Additions

We are adding 3 stocks to the portfolio. These include: Banco Macro Sa (Adr) (BMA), Nk Lukoil Pao (Adr) (LUKOY) and Onemain Holdings Inc (OMF).

Latest Changes

Additions  
BANCO MACRO SA (ADR) BMA
NK LUKOIL PAO (ADR) LUKOY
ONEMAIN HOLDINGS INC OMF
Deletions  
Essent Group Ltd ESNT
CBRE GROUP INC CBRE
MONSTER BEVERAGE CORP MNST

How ETFs Work - And Why Everyone Benefits

Exchange traded funds are a hit with investors, who have put billions of dollars into them over the years creating a fast-growing corner of the investment product market. But investors may not understand exactly how ETFs work, and that makes the ETF industry ripe for conspiracy theories.

There has long been cynicism of Wall Street's product manufacturing methods, to be sure. The Street has a reputation for enhancing itself at the expense of the individual investor. That reputation sometimes leads people to always assume the worst and always think that individual investors are always getting the short end of the stick.

In this essay, Validea's Jack Forehand takes on a recent Bloomberg article that looked at how ETFs trade, and whether big investment firms are using that process as a tax dodge.

A recent article in Bloomberg called into question whether ETFs are being used as a tax dodge by large institutions via what the authors call "heartbeat" transactions that are used as a method to avoid taxes. I think this suggestion is a misrepresentation of what is going on and doesn't properly reflect the many benefits individual investors get from the process they are referring to. In order to understand why that is, it is important to first take a step back and look at how ETFs work.

But before I go further, I think it is important that I disclose my own bias. Our separate investment management firm, Validea Capital Management, is an issuer of an ETF and I am a portfolio manager of that ETF. I don't discuss that ETF on this blog or on social media so I won't name it here, but I think it is important that I disclose any personal interest I have in any topics I write about so I wanted to make that clear.

Both mutual funds and ETFs operate using an open-ended structure. They pool together the capital of their investors and as more investors invest in them they issue new shares and their assets rise. Investors can purchase shares of a mutual fund once per day at the closing net asset value. When new money flows into a mutual fund, the manager will typically deploy it into their holdings. When money flows out, the manager will sell holdings to free up the cash to meet those redemptions.

Mutual Funds vs. ETFs

When mutual funds sell holdings that have appreciated, whether it be because they have to due to investor redemptions or because they want to as part of a portfolio rebalancing, they can generate taxable gains. If the net gains of a fund are positive at the end of the year, those gains are passed on to shareholders via a capital gains distribution. These distributions are not optimal for long-term investors because they generate a tax liability regardless of whether an investor actually sells their shares. So an investor in a mutual fund is in many ways subject to the decisions of others with respect to their tax liability. If other investors decide to sell their shares, it can create a tax liability for those who continue to hold. If an investor invests in a fund with significant gains prior to their investment and then the manager realizes those gains, that investor can incur a tax liability as well, even though they did not participate in those gains.

ETFs are different than mutual funds in several major ways. The first is that they trade throughout the day. The second is that they disclose their holdings each day via their website (mutual funds report holdings quarterly on a delayed basis). But the most important difference for the purpose of this discussion is that ETFs are more tax efficient and feature mechanisms to address the tax issues I outlined above with mutual funds. All of these differences are interrelated in a way that will become clear as I explain it further.

While mutual funds create or redeem shares each night at their net asset value, ETFs need a way to do it during the trading day. This is where creation and redemption transactions come into play and it is also where all the differences with mutual funds I outlined above come together. For ETFs to trade throughout the trading day, the first thing that is required is for the market to know the value of their shares. This is where the fact that ETFs disclose their holdings daily is important. Daily disclosure allows market participants to see exactly what ETFs hold and therefore determine their NAV throughout the day. Authorized participants can create or redeem ETF shares at any time, which both keeps the price of an ETF close to its NAV and significantly improves tax efficiency.

The easiest way to understand how the ETF creation and redemption process works is to look at a simple example.

A Simple Example

Let's assume that I launch an ETF today and my initial portfolio will contain two stocks, Apple and Amazon. ETF shares are issued in fixed amounts which are called creation units. Each unit typically represents 50,000 shares of the ETF. To bring my ETF to market, the first thing I will need is someone to facilitate the trading of it and to issue the initial batch of these creation units. This will require a lead market maker and seed capital. Most ETFs come to market with 100,000 shares trading at $25 (two 50,000 share creation units). That means I need $2.5 million to get things started. For the purposes of this simple example, we will assume that my lead market maker is providing that capital.

On my first trading day, the market maker would execute a creation transaction. The creation is a tax-free transaction where the market maker receives the ETF shares that are needed to get the ETF trading, and in exchange they provide the fund with an equal dollar value of the stocks in its portfolio. So in this case the market maker gets $2.5 million in ETF shares and the fund gets $1.25 million each of Apple and Amazon. The transaction balances out and is tax free for both sides. The market maker will now use those 100,000 shares it has to make the initial market in the ETF.

Now let's assume that my ETF performs really well and investors start to accumulate shares of the fund. At some point, the market maker will run out of the 100,000 shares and won't have shares to sell to new investors. They can easily resolve that problem by issuing new shares in those same 50,000 share increments. Every time they do it, they get 50,000 shares and the fund gets an equal amount of its holdings.

So far the process has been fairly straight forward. My new ETF was launched and new shares were issued on an ongoing basis in response to demand.

Now let's look at the two situations that generated capital gains distributions for mutual fund holders in the previous example.

First, let's assume that my two-stock portfolio starts to perform poorly and investors withdraw money from the fund and sell their shares. Now my market maker will begin to build up an inventory of shares they are buying from all the sellers. At some point, their inventory will become more than they want to hold. This might seem like a significant problem for them, but in reality, it is quite easy to resolve. Just like they could create shares of my ETF on demand, they can also redeem them. The redeem transaction is just the opposite of the create. The market maker gives 50,000 ETF shares back to the fund (effectively destroying them), and in exchange the fund gives them an equal value of the two stocks it holds and fund assets fall. This is a tax-free transaction so even if the fund has a gain on those shares, the gain is not passed on to shareholders. This is the first major difference between ETFs and mutual funds when it comes to taxes. If a mutual fund has to sell appreciated stock to meet redemptions, those gains will be passed on to shareholders in the form of capital gains distribution (assuming the fund has net gains at the end of its fiscal year). But with an ETF, the shareholders that remain in the fund are not punished for the decisions of other shareholders to sell.

What Those "Heartbeats" Really Are

There is also one other time when the ETF structure helps prevent capital gains distributions from being passed on to shareholders. This is the situation the Bloomberg article referred to as "Heartbeats". The name people in the ETF industry use for these transactions is custom creates and redeems. Custom create and redeem transactions follow the same principle as the standard creates and redeems I discussed above, but with one major difference. Custom creates and redeems allow the fund to specify which securities from their portfolio are included in the transaction. The best way to illustrate this is to return to our example. Let's say I am a great stock picker and my position in Amazon doubles. Now I decide that I want to take my gains and buy Microsoft instead. I can work with an authorized participant (someone who is allowed to perform create and redeem transactions) to execute a custom redeem transaction where I can give them just my Amazon position in exchange for the shares of my ETF they redeem instead of giving them my whole portfolio. The net result is that I am able to remove Amazon via a tax-free exchange and the fund does not realize any gains. If I continue to use that method throughout the year to remove my gaining positions, then my fund will not have gains that need to be passed on to shareholders at year end and there will be no capital gains distribution.

ETFs Benefit the Long-Term Investor

The net result of all of this is that ETFs are able to both meet redemptions and sell their gaining positions without causing tax implications for shareholders. It doesn't make the tax go away. It just means that shareholders get to decide when their gains are realized based on when they decide to sell their shares. This is a significant benefit for shareholders of ETFs relative to shareholders of mutual funds. It also rewards good investing behavior by offering benefits to those who hold ETFs for the long-run by allowing them to only pay taxes on their gains when they sell.

In the end, ETFs offer a fund structure that is very friendly for long-term investors. In my opinion, the way the Bloomberg article represented the creation and redemption process as one that benefits large Wall Street insiders was misleading. When you look under the hood at how ETFs work, it is clear they are not setup for the benefit of large institutions at the expense of everyday investors. The biggest beneficiaries are all of us who use ETFs as long-term investments.

Newcomers to the Hot List

Banco Macro SA (ADR) (BMA) - This Argentine bank scores highly on the models tracking the investment styles of Warren Buffett, Peter Lynch and Martin Zweig.

NK Lukoil PAO (LUKOY) - Shares of this energy company score highly on several Validea models, including the one tracking James O'Shaughnessy, Pim van Vliet and Tobias Carlisle.

OneMain Holdings Inc. (OMF) - Shares of this financial company score well on the models tracking the styles of Peter Lynch and David Dreman as well as on the momentum portfolio.

News on Hot List Stocks

Discover Financial Services will have its annual shareholder meeting on May 16 at its headquarters in Riverwoods, Illinois.

Royal Dutch Shell recently said it would leave the American Fuel & Petrochemical Manufacturers lobby, citing disagreement on climate policies.

Scientific instrument maker Bruker said it bought RAVE's semiconductor mask repair and cleaning business.


Portfolio Holdings
Ticker Date Added Return
RDS.A 2/8/2019 1.7%
LUKOY 4/5/2019 TBD
BRKR 3/8/2019 2.1%
NSIT 3/8/2019 1.8%
NSP 3/8/2019 5.9%
BMA 4/5/2019 TBD
DFS 3/8/2019 6.2%
LPLA 3/8/2019 1.0%
OMF 4/5/2019 TBD
MA 2/8/2019 9.0%


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

RDS.A   |   LUKOY   |   BRKR   |   NSIT   |   NSP   |   BMA   |   DFS   |   LPLA   |   OMF   |   MA   |  

ROYAL DUTCH SHELL PLC (ADR)

Strategy: Growth Investor
Based on: Martin Zweig

The Royal Dutch Shell plc explores for crude oil and natural gas around the world, both in conventional fields and from sources, such as tight rock, shale and coal formations. The Company's segments include Integrated Gas, Upstream, Downstream and Corporate. The Integrated Gas segment is engaged in the liquefaction and transportation of gas and the conversion of natural gas to liquids to provide fuels and other products, as well as projects with an integrated activity, ranging from producing to commercializing gas. The Upstream segment includes the operations of Upstream, which is engaged in the exploration for and extraction of crude oil, natural gas and natural gas liquids, and the marketing and transportation of oil and gas, and Oil Sands, which is engaged in the extraction of bitumen from mined oil sands and conversion into synthetic crude oil. The Downstream segment is engaged in oil products and chemicals manufacturing, and marketing activities.


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. RDS.A's P/E is 11.44, based on trailing 12 month earnings, while the current market PE is 79.00. 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. RDS.A's revenue growth is 2.97%, while it's earnings growth rate is 38.28%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, RDS.A 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 (14.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (19.7%) of the current year. Sales growth for the prior must be greater than the latter. For RDS.A 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. RDS.A's EPS ($1.35) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. RDS.A's EPS for this quarter last year ($0.70) 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. RDS.A's growth rate of 92.86% 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 RDS.A is 19.14%. This should be less than the growth rates for the 3 previous quarters which are 278.95%, 42.86% and -4.29%. RDS.A 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, 51.45%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 92.86%, (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, 92.86% must be greater than or equal to the historical growth which is 38.28%. RDS.A 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. RDS.A, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.36, 0.30, 0.58, 1.80, and 2.80, 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. RDS.A's long-term growth rate of 38.28%, 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. RDS.A's Debt/Equity (38.67%) is not considered high relative to its industry (51.02%) 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 RDS.A, this criterion has not been met (insider sell transactions are 0, while insiders buying number 0). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.


NK LUKOIL PAO (ADR)

Strategy: Book/Market Investor
Based on: Joseph Piotroski

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


BOOK/MARKET RATIO: PASS

The first criteria of this strategy requires that a company be in the top 20% of the market based on the Book/Market ratio (which is the inverse of the Price/Book ratio). LUKOY, which has a book to market ratio of 0.99, meets this criterion and thus this strategy will use the following rules to determine if it is a financially distressed firm or is unfairly trading at a discount to its book value.

The study conducted by Piotroski found that excess returns can be earned by holding a portfolio of high Book/Market stocks. He also found, however, that it is very important to separate companies that trade at a discount because they are financially distressed from companies that are unfairly trading at a discount. The following criteria are used to help provide this distinction.


RETURN ON ASSETS: PASS

As a first step to determining whether a firm is not financially distressed, this methodology requires that the return on assets for the most recent fiscal year be positive. LUKOY's return on assets was 10.52% in the most recent year, therefore it passes this test.


CHANGE IN RETURN ON ASSETS: PASS

The next requirement is that the return on assets for the most recent fiscal year must be greater than the return on assets for the previous fiscal year. LUKOY's return on assets was 10.52% in the most recent year and 8.00% in the previous year, therefore it passes this test.


CASH FLOW FROM OPERATIONS: PASS

In addition to the return on assets, the cash flow from operations for the most recent fiscal year must also be positive. This eliminates companies that are burning cash and therefore are more likely to be financially distressed. LUKOY's cash flow from operations was $15,272.42 million in the most recent year, therefore it passes this test.


CASH COMPARED TO NET INCOME: PASS

This methodology requires that cash from operations for the most current fiscal year must be greater than net income for the most current fiscal year. LUKOY's cash from operations was $15,272.42 million in the most recent year, while its net income was $9,150.17 million, therefore it passes this test.


CHANGE IN LONG TERM DEBT/ASSETS: PASS

The long term debt to assets ratio for the most recent fiscal year must be less than or equal to the previous fiscal year. LUKOY's LTD/Assets was 0.08 in the most recent year and 0.09 in the previous year, therefore it passes this test.


CHANGE IN CURRENT RATIO: PASS

As an additional test of firm solvency, the current ratio for the most recent fiscal year must be greater than the current ratio for the previous fiscal year. LUKOY's current ratio was 1.62 in the most recent year and 1.36 in the previous year, therefore it passes this test.


CHANGE IN SHARES OUTSTANDING: PASS

The issuance of new stock is considered by this methodology to be a sign that a company is not able to generate enough internal cash to fund its business. Therefore, shares outstanding for the most recent fiscal year must be less than or equal to shares outstanding for the previous fiscal year. LUKOY's shares outstanding was 696.9 million in the most recent year and 709.6 million in the previous year, therefore it passes this test.


CHANGE IN GROSS MARGIN: FAIL

As a sign that a company is expanding its profitability, this strategy requires that gross margin for the most recent fiscal year be greater than gross margin for the previous fiscal year. LUKOY's gross margin was 44.00% in the most recent year and 47.00% in the previous year, therefore it fails this test.


CHANGE IN ASSET TURNOVER: PASS

The final criterion of this strategy requires that asset turnover for the most recent fiscal year be greater than asset turnover for the previous fiscal year. LUKOY's asset turnover was 1.40 in the most recent year and 1.14 in the previous year, therefore it passes this test.


BRUKER CORPORATION

Strategy: Contrarian Investor
Based on: David Dreman

Bruker Corporation designs and manufactures scientific instruments, and analytical and diagnostic solutions. Its segments include the Bruker BioSpin Group; the Bruker Chemicals, Applied Markets, Life Science, In-Vitro Diagnostics, Detection (CALID) Group; the Bruker Nano Group, and the Bruker Energy & Supercon Technologies (BEST) Segment. The Bruker BioSpin Group segment designs, manufactures and distributes enabling life science tools. The Bruker CALID segment designs, manufactures and distributes life science mass spectrometry instruments that can be integrated and used along with other sample preparation or chromatography instruments, as well as chemical, biological, radiological, nuclear and explosive detection products. The Bruker Nano segment designs, manufactures and distributes spectroscopy and microscopy instruments. The BEST segment develops and manufactures superconducting and non-superconducting materials and devices. It also focuses on nanomechanical testing instruments.

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. BRKR has a market cap of $6,006 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. BRKR's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.28, 0.50 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. BRKR passes this test as its EPS growth rate over the past 6 months (150.00%) has beaten that of the S&P (-4.10%). BRKR's estimated EPS growth for the current year is (37.72%), which indicates the company is expected to experience positive earnings growth. As a result, BRKR passes this test.


This methodology would utilize four separate criteria to determine if BRKR 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. BRKR's P/E of 33.52, based on trailing 12 month earnings, is higher than the bottom 20% criterion (below 10.94), 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. BRKR's P/CF of 24.43 does not meet the bottom 20% criterion (below 6.18), 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. BRKR's P/B is currently 6.69, which does not meet the bottom 20% criterion (below 1.00), 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%). BRKR's P/D of 238.10 does not meet the bottom 20% criterion (below 19.38), and it therefore fails this test.


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


CURRENT RATIO: PASS

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [2.19] or greater than 2). This is one identifier of financially strong companies, according to this methodology. BRKR's current ratio of 2.18 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 BRKR is 14.02%, while its historical payout ratio has been 20.97%. Therefore, it passes the payout criterion.


RETURN ON EQUITY: PASS

The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 17.92%, and would consider anything over 27% to be staggering. The ROE for BRKR of 22.16% 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. BRKR's pre-tax profit margin is 12.91%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. BRKR's current yield is 0.42%, while the market yield is 2.53%. BRKR fails this test.


LOOK AT THE TOTAL DEBT/EQUITY: PASS

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 69.89%. BRKR's Total Debt/Equity of 38.04% is considered acceptable.


INSIGHT ENTERPRISES, INC.

Strategy: Growth Investor
Based on: Martin Zweig

Insight Enterprises, Inc. is a global information technology company. The Company provides its services to business of all sizes from small and medium-sized firms to enterprises, governments, schools and healthcare organizations. It defines, architects, implements and manages Intelligent Technology Solutions in North America, Europe, the Middle East and Africa and Asia-Pacific. The Company's new go-to-market messaging helps organizations manage their technology today and transform for tomorrow. Its offerings include services solutions offerings, hardware offerings and software offerings. Services solutions offerings include supply chain optimization, connected workforce solution, Cloud and data center transformation and digital Innovation. Its hardware offerings offers products from hundreds of manufacturers, including Cisco, HP Inc., Lenovo, Dell, HP, EMC, Apple and IBM. Its software offerings offer products from hundreds of publishers, including Microsoft, Adobe and VMware.


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. NSIT's P/E is 12.75, based on trailing 12 month earnings, while the current market PE is 79.00. 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. NSIT's revenue growth is 7.85%, while it's earnings growth rate is 25.42%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, NSIT 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 (-2%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-0.6%) of the current year. Sales growth for the prior must be greater than the latter. For NSIT 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. NSIT's EPS ($1.15) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. NSIT's EPS for this quarter last year ($0.76) 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. NSIT's growth rate of 51.32% 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 NSIT is 12.71%. This should be less than the growth rates for the 3 previous quarters, which are 136.84%, 30.63%, and 43.55%. NSIT 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, 53.55%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 51.32%, (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 NSIT is 51.3%, 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, 51.32% must be greater than or equal to the historical growth which is 25.42%. NSIT 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. NSIT, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.83, 1.98, 2.32, 2.87 and 4.39, 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. NSIT's long-term growth rate of 25.42%, 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. NSIT's Debt/Equity (19.95%) is not considered high relative to its industry (127.40%) 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. For NSIT, this criterion has been met, indicating an insider buy signal.


INSPERITY INC

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

Insperity, Inc. provides a range of human resources (HR) and business solutions. The Company's HR services offerings are provided through its Workforce Optimization and Workforce Synchronization solutions (together, its professional employer organization (PEO) HR Outsourcing solutions), which encompass a range of human resources functions, including payroll and employment administration, employee benefits, workers' compensation, performance management and training and development services, along with its cloud-based human capital management platform, the Employee Service Center (ESC). In addition to its PEO HR Outsourcing solutions, it offers various other business performance solutions, including Human Capital Management, Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Retirement Services and Insurance Services, which are offered through desktop applications and cloud-based delivery models.


MARKET CAP: PASS

The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. NSP, with a market cap of $5,269 million, passes this criterion.


EARNINGS PER SHARE PERSISTENCE: PASS

The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. NSP, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.53, 0.79, 1.54, 2.08 and 3.24, passes this test.


PRICE/SALES RATIO: PASS

The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. NSP's Price/Sales ratio of 1.38, based on trailing 12 month sales, passes this criterion.


RELATIVE STRENGTH: PASS

The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. NSP, whose relative strength is 94, is in the top 50 and would pass this last criterion.


BANCO MACRO SA (ADR)

Strategy: Growth Investor
Based on: Martin Zweig

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


P/E RATIO: PASS

The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. BMA's P/E is 7.82, based on trailing 12 month earnings, while the current market PE is 79.00. Therefore, it passes the first test.


REVENUE GROWTH IN RELATION TO EPS GROWTH: PASS

Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. BMA's revenue growth is 46.49%, while it's earnings growth rate is 41.54%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, BMA passes this criterion.


SALES GROWTH RATE: FAIL

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (99.5%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (128%) of the current year. Sales growth for the prior must be greater than the latter. For BMA this criterion has not been met and fails this test.


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


CURRENT QUARTER EARNINGS: PASS

The first of these criteria is that the current EPS be positive. BMA's EPS ($1.88) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. BMA's EPS for this quarter last year ($0.13) pass this test.


POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS

The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. BMA's growth rate of 1,346.15% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: PASS

Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for BMA is 20.77%. This should be less than the growth rates for the 3 previous quarters, which are 22.22%, 40.00%, and 81.82%. BMA passes this test, which means that it has good, reasonably steady earnings.


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


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

If the growth rate of the prior three quarter's earnings, 50.00%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 1,346.15%, (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, 1,346.15% must be greater than or equal to the historical growth which is 41.54%. BMA would therefore pass this test.


EARNINGS PERSISTENCE: PASS

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. BMA, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.14, 0.21, 0.27, 0.39 and 0.58, passes this test.


LONG-TERM EPS GROWTH: PASS

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. BMA's long-term growth rate of 41.54%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.


INSIDER TRANSACTIONS: PASS

A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For BMA, this criterion has not been met (insider sell transactions are 0, while insiders buying number 0). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.


DISCOVER FINANCIAL SERVICES

Strategy: Growth Investor
Based on: Martin Zweig

Discover Financial Services (DFS) is a direct banking and payment services company. The Company is a bank holding company, as well as a financial holding company. The Company operates through two segments: Direct Banking and Payment Services. It provides direct banking products and services, and payment services through its subsidiaries. It offers its customers credit card loans, private student loans, personal loans, home equity loans and deposit products. The Company's Direct Banking segment includes consumer banking and lending products, specifically Discover-branded credit cards issued to individuals and small businesses on the Discover Network and other consumer banking products and services. The Company's direct banking offers credit cards, student loans, personal loans, home equity loans, and other consumer lending and deposit products. The Payment Services segment includes PULSE, Diners Club and the Company's Network Partners business.


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. DFS's P/E is 9.52, based on trailing 12 month earnings, while the current market PE is 79.00. 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. DFS's revenue growth is 9.82%, while it's earnings growth rate is 12.17%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, DFS fails this criterion.


SALES GROWTH RATE: PASS

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (13.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (12.3%) of the current year. Sales growth for the prior must be greater than the latter. For DFS 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. DFS's EPS ($2.03) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. DFS's EPS for this quarter last year ($1.53) 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. DFS's growth rate of 32.68% 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 DFS is 6.09%. This should be less than the growth rates for the 3 previous quarters, which are 27.27%, 35.71%, and 28.30%. DFS 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, 30.32%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 32.68%, (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, 32.68% must be greater than or equal to the historical growth which is 12.17%. DFS 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. DFS, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 4.90, 5.13, 5.76, 5.94 and 7.79, 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. DFS's long-term growth rate of 12.17%, based on the average of the 3, 4 and 5 year historical eps growth rates, fails the minimum required.


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 DFS, this criterion has not been met (insider sell transactions are 15, while insiders buying number 25). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.


LPL FINANCIAL HOLDINGS INC

Strategy: Growth Investor
Based on: Martin Zweig

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


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. LPLA's P/E is 14.92, based on trailing 12 month earnings, while the current market PE is 79.00. 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. LPLA's revenue growth is 5.19%, while it's earnings growth rate is 30.77%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, LPLA 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 (18%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (25.1%) of the current year. Sales growth for the prior must be greater than the latter. For LPLA 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. LPLA's EPS ($1.36) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. LPLA's EPS for this quarter last year ($0.60) 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. LPLA's growth rate of 126.67% 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 LPLA is 15.39%. This should be less than the growth rates for the 3 previous quarters, which are 94.23%, 75.68%, and 88.89%. LPLA 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, 85.19%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 126.67%, (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, 126.67% must be greater than or equal to the historical growth which is 30.77%. LPLA 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. LPLA, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.75, 1.74, 2.13, 2.50, and 4.85, 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. LPLA's long-term growth rate of 30.77%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.


INSIDER TRANSACTIONS: PASS

A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For LPLA, this criterion has not been met (insider sell transactions are 21, while insiders buying number 28). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.


ONEMAIN HOLDINGS INC

Strategy: Contrarian Investor
Based on: David Dreman

OneMain Holdings, Inc. is a financial services holding company. The Company is a consumer finance company, which is engaged in providing personal loan products; credit and non-credit insurance, and service loans owned by it and service or subservice loans owned by third-parties. The Company's segments include Consumer and Insurance; Acquisitions and Servicing; Real Estate, and Other. It is engaged in pursuing strategic acquisitions and dispositions of assets and businesses, including loan portfolios or other financial assets. The Company originates and services personal loans (secured and unsecured) through two business divisions: branch operations and centralized operations. As of December 31, 2016, its combined branch operations included over 1,800 branch offices in 44 states. It offers optional credit insurance products to its customers, including credit life insurance, credit disability insurance, credit involuntary unemployment insurance and collateral protection insurance.

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. OMF has a market cap of $4,504 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. OMF's EPS for the past 2 quarters, (from earliest to most recent quarter) 1.09, 1.23 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. OMF passes this test as its EPS growth rate over the past 6 months (2,360.00%) has beaten that of the S&P (-4.10%). OMF's estimated EPS growth for the current year is (72.34%), which indicates the company is expected to experience positive earnings growth. As a result, OMF passes this test.


This methodology would utilize four separate criteria to determine if OMF 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. OMF's P/E of 10.08, based on trailing 12 month earnings, meets the bottom 20% criterion (below 10.94), and therefore passes this test.


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

The P/CF of a company should be in the bottom 20% of the overall market. OMF's P/CF of 6.12 meets the bottom 20% criterion (below 6.18) and therefore passes this test.


PRICE/BOOK (P/B) VALUE: FAIL

The P/B value of a company should be in the bottom 20% of the overall market. OMF's P/B is currently 1.18, which does not meet the bottom 20% criterion (below 1.00), 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%). OMF's P/D of 33.11 does not meet the bottom 20% criterion (below 19.38), and it therefore fails this test.


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


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 OMF 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: 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 17.92%, and would consider anything over 27% to be staggering. The ROE for OMF of 12.63% 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. OMF's pre-tax profit margin is 14.72%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. OMF's current yield is 3.02%, while the market yield is 2.53%. OMF fails this test.


MASTERCARD INC

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

MasterCard Incorporated is a technology company that connects consumers, financial institutions, merchants, governments and businesses across the world, enabling them to use electronic forms of payment. The Company operates through Payment Solutions segment. The Company allows user to make payments by creating a range of payment solutions and services using its brands, which include MasterCard, Maestro and Cirrus. The Company provides a range of products and solutions that support payment products, which customers can offer to their cardholders. The Company's services facilitate transactions on its network among cardholders, merchants, financial institutions and governments. The Company's products include consumer credit and charge, commercial, debit, prepaid, commercial and digital. The Company's consumer credit and charge offers a range of programs that enables issuers to provide consumers with cards allowing users to defer payment.


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. MA's profit margin of 38.69% passes this test.


RELATIVE STRENGTH: FAIL

The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. Although MA's relative strength of 87 is below the acceptable level, yet it is very close. Keep an eye on the stock as it could move into the acceptable range.


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 MA (-15.96% for EPS, and 14.95% for Sales) are not good enough to pass.


INSIDER HOLDINGS: PASS

MA's insiders should own at least 10% (they own 11.18% ) 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. MA's free cash flow of $4.46 per share passes this test.


PROFIT MARGIN CONSISTENCY: FAIL

The profit margin in the past must be consistently increasing. The profit margin of MA has been inconsistent in the past three years (Current year: 39.19%, Last year: 31.33%, Two years ago: 37.67%), 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: 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 MA's case.


CASH AND CASH EQUIVALENTS: PASS

MA's level of cash $8,378.0 million passes this criteria. If a company is a cash generator, like MA, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.


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 MA was 26.76% last year, while for this year it is 31.63%. 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.


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

The "Fool Ratio" is an extremely important aspect of this analysis. The methodology says consider shorting shares when the company's Fool Ratio is greater than 1.30. MA's PEG Ratio of 2.56 is excessively high.

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

AVERAGE SHARES OUTSTANDING: PASS

MA has not been significantly increasing the number of shares outstanding within recent years which is a good sign. MA currently has 1,038.0 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. MA's sales of $14,950.0 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: FAIL

MA does not pass the Daily Dollar Volume (DDV of $831.4 million) test. It exceeds the maximum requirement of $25 million. Stocks that fail the test are too liquid for a small individual investor and many institutions have already discovered it.


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. MA with a price of $236.06 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

MA's income tax paid expressed as a percentage of pretax income either this year (19.71%) or last year (28.06%) 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%).



Watch List

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

Ticker Company Name Current
Score
CBRE CBRE GROUP INC 63%
AYI ACUITY BRANDS, INC. 59%
TX TERNIUM SA (ADR) 58%
REGI RENEWABLE ENERGY GROUP INC 55%
ATHM AUTOHOME INC (ADR) 55%
BBY BEST BUY CO INC 54%
BK BANK OF NEW YORK MELLON CORP 52%
PCTY PAYLOCITY HOLDING CORP 51%
TECK TECK RESOURCES LTD (USA) 51%
NXST NEXSTAR MEDIA GROUP INC 51%



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