Economy and Markets

As anticipated, the Fed raised rates last week, but the market's reaction didn't quite follow the "Three Steps and a Stumble" adage - the tendency for the U.S. stock market to suffer a dip upon the Fed's third hike in a recovery cycle. For the week ended March 17th, the Dow Jones Industrial Average rose 11.64 points (0.1%) to 20,914, while the S&P 500 rose by 0.2% to 2378.25, its seventh weekly gain over the past eight weeks. The Nasdaq gained 0.7%. Utilities and telecommunication stocks led the gains, as lower bond yields added to their high-dividend-payer appeal. One of the trends we're seeing in the market so far this year is the outperformance of large over small caps, and growth stocks over value names. While it's still early, these trends are worth keeping an eye on as they are opposite of what worked immediately after the November election, as the market discounted potentially better growth and the "reflation" trade kicked in.

The market has exhibited some recent weakness as investors fret over President Trump's agenda, questioning whether or not the repeal and replace of Obamacare will pass the House and the Senate. As of this writing, the outcome of the House vote is still an unknown, but some investors are starting to grow anxious because if the Republicans can't agree on replacing Obamacare, which seemed on the surface to be a slam dunk, then what does it say for the rest of the Trump Administration's strategic initiatives - tax reform, trade policy, regulatory reform and more.

Consumer confidence, which suffered a dip in January, increased in February from 111.6 to 114.8 (data provided by the Conference Board Consumer Confidence Index), fueled by continued perceived growth in the U.S. economy. Unemployment dipped slightly from 4.8% in January to 4.7% in February, and the economy saw 235,000 jobs created in February. Initial jobless claims remained low at 241,000.

Higher financing costs did not seem to deter mortgage applications, which rose by 3.1% last week. Retail sales increased by 0.1% despite weak auto sales. According to the Bureau of Economic Analysis, real GDP increased by 1.9% in the fourth quarter of 2016. In January, personal income grew by 0.4% ($63 billion) and disposable income rose by 0.3% ($40 billion).

The Consumer Price Index for All Urban Consumers (CPI-U) for all items rose by 0.1% in February, after rising by 0.6% in January. The February increase was the smallest 1-month rise in the all-items index since July 2016. The food index increased by 0.2% compared to January, its largest rise since September 2015. Gasoline prices declined, however, partially offsetting increases in food, shelter and recreation.

Housing starts in February came in at 1,288,000, 3% above the January estimate of 1,251,000. Of those, the majority were single-family (872,000, 6.5% above the January estimate of 819,000). As the job market has improved, more Americans are looking to purchase homes notwithstanding the rise in interest rates.

The P/E ratio for the S&P 500 (24.89 as of March 17th) is up slightly from a year ago (23.61).The earnings outlook is upbeat, but it remains to be seen when and if the new administration's policy proposals come to fruition. Along with the Fed's current and forward interest rate actions, uncertainty continues to loom.

Performance Update

Since our last newsletter, the S&P 500 returned -0.8%, while the Hot List returned 4.0%. So far in 2016, the portfolio has returned 6.7% vs. 4.8% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 230.2% vs. the S&P's 134.5% gain.

Buffett's View on Market Valuations

A few weeks ago, Warren Buffett released his letter to Berkshire Hathaway shareholders, which was full of interesting facts, figures and insights. One of the many important takeaways was his view on the market's current valuation, which differs from that of many investors as we move ahead in this 8th year of the bull market.

In a CNBC interview that aired last month, Warren Buffett shared his thoughts on current market valuations and how he would respond to investors that feel they missed their opportunity to buy into the market. "Well, I would say they don't know, and I don't know. And if there's a game it's very good to be in for the rest of your life, the idea to stay out of it because you think you know when to enter it -- is a terrible mistake."

Buffett believes the U.S. stock market is a good game to be in. In fact, the dominant theme of his 2016 letter to Berkshire shareholders (which was released immediately prior to the interview) is the unwavering belief that America continues to be the best bet around. "This country," he declares, "always comes back and wins. We have not lost the secret sauce."

The investing legend's eternal optimism extends to what many regard as a swollen market teetering on the edge of correction. This contrasts with Nobel Laureate Robert Shiller's argument, shared in a recent Bloomberg interview, that the CAPE ratio, then at 29, is a "bad sign." Shiller says, "This could be like 1997, when the CAPE was at 29 and held on for 10 years, but it doesn't look good." In 1997, he explains, "the country didn't have the hope it has now." The president, he says, "dominates our attention."

Earlier this month, Ritholtz Wealth Management's Ben Carlson wrote that the CAPE reached 30, an event that occurred two other times since 1871 and, in each case, was followed by stock market "doom." Carlson points out, however, that a sample size of two events is "far too few to draw conclusions about what is going to happen this time around." Every cycle, he says, is different in its optics; interest rates, inflation and general economic and political conditions are unique and can lead to widely different market reactions and outcomes. "Valuations alone," the article asserts, "can't force the market to crash and mean reversion doesn't run on a schedule, but investors need to be aware of the potential risks in the market from current levels."

According to Buffett, "We're not in bubble territory or anything of the sort." For him, the crux of investing remains in the companies themselves, not in the value the market places on them. His belief that stocks represent a good value notwithstanding current valuation levels is built on the comparison of earnings yield against the 10-year Treasury bond. "Measured against interest rates," Buffett argues, "stocks actually are on the cheap side compared to historic valuations -- I would say this, if the ten-year stays at 2.3% and would stay there for ten years, you would regret very much not having bought stocks now."

Since owning a share of stock equates to owning a small part of a company, Buffett focuses on earnings yield to evaluate the return he will receive on an investment (the assumption being that a company's management won't distribute all earnings through dividends).

Earnings yield is calculated as follows:

Earnings Yield: (Annual Earnings Per Share / Market Price) X 100

The lower the stock price is in relation to its earnings, the higher the earnings yield-- which is actually the inverse of the P/E ratio -- and the calculation can be applied to individual stocks and the market as a whole. When the yield of the market index is higher than that of the 10-year Treasury bond, stocks can be considered as undervalued in comparison to bonds, a prime investing scenario for Buffett. The current median P/E of all stocks tracked by Validea is 23.4, implying a 4.3% earnings yield. The chart below shows the 10-year Treasury bond vs. the market's earnings yield (using the median P/E in the Validea database). As you can see, the earnings yield has been coming down as valuations have been going up. In March of 2009, based on our own internal figures, the market has an implied earnings yield of 8.8%, using the median P/E, while the 10 year was trading at 2.8%. For a small period of time, the earnings yield on the market was 3x that of the ten year yield, which signaled an excellent buying opportunity.



So what's the takeaway -- while stocks may not look cheap based on most traditional measures their value relative to the alternatives suggest that they still may hold promise for investors.

As Buffett so astutely points out during the interview, "The ten-year bond is selling at 40 times earnings. And it's not going to grow. And if you can buy some business that earns high returns on equity and has even got mild growth prospects, you know, at much lower multiple earnings, you are going to do better than buying ten-year bonds at 2.3% or 30-year bonds at three, or something of the sort. But that's been true for quite a while."

Recommended Reading

In our popular Validea Guru Investor blog, we provide current news and market data that we believe is relevant and useful to investors. In each Hot List newsletter, we will highlight recent items posted since the last newsletter:

  • Buffett Poised to Win Million Dollar Bet with Protege Read Full Post.


  • Tepper Likes the Market's Economic Backdrop: Current economic conditions provide a solid backbone for the market. Read Full Post.


  • Bob Doll Says a Market Correction is Possible: Nuveen's chief investment says market optimism may be "overdone." Read Full Post.


  • It Might Be Time to Cool Off on Value Stocks: value stocks may be getting picked over. Read Full Post.


  • Interest Rate Sensitivity and Low-Vol Investing: Interest rates and their effect on security prices. Read Full Post.


  • Value Stock Picks in an Elevated Market: Our piece on finding values in today's elevated market. Read Full Post.


  • Bill Gross Warns Investors to Preserve Capital: bond guru Gross says investors should preserve capital. Read Full Post.


    • News About Hot List Stocks

    Banco Macro (BMA), the second largest domestically-owned private bank in Argentina, provides services to individual and corporate retail customers as well as to over four provincial governments. Earlier this month, Moody's Latin America improved its outlook from stable to positive on multiple Argentine banks including BMA and Grupo Financiero Galicia (GGAL), another company on our Hot List.

    Huntington Ingalls Industries Inc. (HII) is a military shipbuilding company that provides design, construction, repair and maintenance services to the United States Navy and the United States Coast Guard. As the Navy's largest shipbuilder, HII faces significant upside potential from the Trump administration's plan to increase defense spending after years of stagnation. The president envisions an increase from 274 ships to 350 ships, which would represent the largest naval buildup since the Cold War.

    Cooper Tire and Rubber Co. (CTB) specializes in the design, manufacture, marketing and sale of passenger car, light and medium truck, motorcycle and racing tires. The company's shares reached a 52-week high this month and, in February, CTB announced its 180th consecutive dividend payment as well as an increase and extension of its share repurchase program (through December 31, 2019) to include up to $300 million in outstanding common stock (representing approximately 15 percent of current market capitalization).

    Portfolio Holdings
    Ticker Date Added Return
    SAFM 11/18/2016 22.3%
    WD 3/10/2017 5.0%
    GGAL 2/10/2017 5.8%
    BMA 7/1/2016 14.5%
    CIM 3/10/2017 4.6%
    HII 3/10/2017 -1.8%
    EGOV 3/10/2017 -2.9%
    AEIS 3/10/2017 2.0%
    HIBB 3/10/2017 -3.5%
    CTB 3/10/2017 5.5%


    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

    SAFM   |   WD   |   GGAL   |   BMA   |   CIM   |   HII   |   EGOV   |   AEIS   |   HIBB   |   CTB   |  

    SANDERSON FARMS, INC.

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

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


    DETERMINE THE CLASSIFICATION:

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


    P/E/GROWTH RATIO: PASS

    The investor should examine the P/E (11.10) relative to the growth rate (25.52%), based on the average of the 3 and 4 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for SAFM (0.44) is very favorable.


    SALES AND P/E RATIO: PASS

    For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. SAFM, whose sales are $2,899.2 million, needs to have a P/E below 40 to pass this criterion. SAFM's P/E of (11.10) is considered acceptable.


    INVENTORY TO SALES: PASS

    When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for SAFM was 7.09% last year, while for this year it is 7.82%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (0.73%) is below 5%.


    EPS GROWTH RATE: PASS

    This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for SAFM is 25.5%, based on the average of the 3 and 4 year historical eps growth rates, which is acceptable.


    TOTAL DEBT/EQUITY RATIO: PASS

    This methodology would consider the Debt/Equity ratio for SAFM (0.00%) to be wonderfully low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.


    FREE CASH FLOW: NEUTRAL

    The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for SAFM (2.23%) 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 SAFM (10.74%) 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.

    WALKER & DUNLOP, INC.

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

    Walker & Dunlop, Inc. is a holding company, which conducts its operations through Walker & Dunlop, LLC. The Company provides commercial real estate financial products and services primarily to developers and owners of multifamily properties. The Company originates, sells and services a range of multifamily and other commercial real estate financing products, including Multifamily Finance, Federal Housing Administration (FHA) Finance, Capital Markets, and Proprietary Capital. It originates and sells loans through the programs of the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac, and together with Fannie Mae, the government-sponsored enterprises (GSEs)), the Government National Mortgage Association (Ginnie Mae) and the Federal Housing Administration, a division of the United States Department of Housing and Urban Development (together with Ginnie Mae, HUD).


    DETERMINE THE CLASSIFICATION:

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


    P/E/GROWTH RATIO: PASS

    The investor should examine the P/E (11.77) relative to the growth rate (30.36%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for WD (0.39) is very favorable.


    SALES AND P/E RATIO: NEUTRAL

    For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. WD, whose sales are $575.3 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate.


    EPS GROWTH RATE: PASS

    This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for WD is 30.4%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.


    TOTAL DEBT/EQUITY RATIO: NEUTRAL

    WD 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. WD'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. WD's ROA (3.48%) is above the minimum 1% that this methodology looks for, thus passing the criterion.


    FREE CASH FLOW: BONUS PASS

    The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for WD (56.54%) is high enough to add to the attractiveness of the stock.


    NET CASH POSITION: NEUTRAL

    Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for WD (-148.14%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.

    GRUPO FINANCIERO GALICIA S.A. (ADR)

    Strategy: Growth Investor
    Based on: Martin Zweig

    Grupo Financiero Galicia S.A. (Grupo Financiero Galicia) is a financial services holding company. The Company's segments include Banking, Regional Credit Cards, CFA, Insurance and Other Grupo Galicia Businesses. Banco de Galicia y Buenos Aires S.A. (Banco Galicia) is a subsidiary of the Company. Its banking business segment represents Banco Galicia consolidated line by line with Banco Galicia Uruguay S.A. (Galicia Uruguay). It operates the regional credit cards segment through Tarjetas Regionales S.A. and its subsidiaries. Its CFA business segment extends unsecured personal loans to low and middle-income segments of the Argentine population. The Company operates the insurance segment through Sudamericana Holding S.A. and its subsidiaries. Its Other Grupo Galicia Businesses segment includes the results of Galicia Warrants S.A., Galicia Administradora de Fondos S.A. Sociedad Gerente de Fondos Comunes de Inversion and Net Investment S.A.


    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. GGAL's P/E is 12.71, based on trailing 12 month earnings, while the current market PE is 18.00. 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. GGAL's revenue growth is 36.86%, while it's earnings growth rate is 47.43%, based on the average of the 3, 4 and 5 year historical eps growth rates. Sales growth is not at least 85% of EPS growth so the initial part of this criteria is not met, however, since both sales growth and eps growth are greater than 30%, that requirement is waived and the company passes this test.


    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 (14.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (42.6%) of the current year. Sales growth for the prior must be greater than the latter. For GGAL 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. GGAL's EPS ($0.88) pass this test.


    QUARTERLY EARNINGS ONE YEAR AGO: PASS

    The EPS for the quarter one year ago must be positive. GGAL's EPS for this quarter last year ($0.07) 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. GGAL's growth rate of 1,157.14% 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 GGAL is 23.72%. This should be less than the growth rates for the 3 previous quarters, which are 40.00%, 33.33%, and 50.00%. GGAL 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, 41.18%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 1,157.14%, (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, 1,157.14% must be greater than or equal to the historical growth which is 47.43%. GGAL 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. GGAL, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.07, 0.09, 0.17, 0.22 and 0.30, 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. GGAL's long-term growth rate of 47.43%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.

    BANCO MACRO SA (ADR)

    Strategy: Contrarian Investor
    Based on: David Dreman

    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.

    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. BMA has a market cap of $4,984 million, therefore passing the test.


    EARNINGS TREND: PASS

    A company should show a rising trend in the reported earnings for the most recent quarters. BMA's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.19, 1.86 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. BMA passes this test as its EPS growth rate over the past 6 months (933.33%) has beaten that of the S&P (5.05%). BMA's estimated EPS growth for the current year is (1,082.19%), which indicates the company is expected to experience positive earnings growth. As a result, BMA passes this test.


    This methodology would utilize four separate criteria to determine if BMA 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. BMA's P/E of 11.84, based on trailing 12 month earnings, meets the bottom 20% criterion (below 13.37), 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. BMA's P/CF of 11.16 does not meet the bottom 20% criterion (below 7.48), 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. BMA's P/B is currently 3.50, which does not meet the bottom 20% criterion (below 1.06), 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%). BMA's P/D of 114.94 does not meet the bottom 20% criterion (below 20.66), 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 BMA is 9.12%, while its historical payout ratio has been 10.55%. 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 16.04%, and would consider anything over 27% to be staggering. The ROE for BMA of 34.44% 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. BMA's pre-tax profit margin is 41.49%, thus passing this criterion.


    YIELD: FAIL

    The company in question should have a yield that is high and that can be maintained or increased. BMA's current yield is 0.87%, while the market yield is 2.62%. BMA fails this test.

    CHIMERA INVESTMENT CORPORATION

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

    Chimera Investment Corporation is a real estate investment trust (REIT). The company is engaged in the business of investing in a portfolio of mortgage assets, including agency residential mortgage-backed security (RMBS), non-agency RMBS, agency commercial mortgage-backed securities (CMBS), residential mortgage loans and real estate related securities. The Company's objective is to provide risk-adjusted returns to its investors over the long-term, primarily through dividends and secondarily through capital appreciation. The Company focuses to achieve this objective by investing in an investment portfolio of RMBS, agency CMBS, residential mortgage loans, commercial mortgage loans, real estate-related securities and various other asset classes. The MBS and real estate-related securities the Company purchases include investment-grade and non-investment grade classes, including the BB-rated, B-rated and non-rated classes. It also invests in investment grade and non-investment grade RMBS.


    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. CIM's profit margin of 59.09% 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. CIM, with a relative strength of 78, fails this test.


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

    Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for CIM (90.16% for EPS, and 29.18% for Sales) are good enough to pass.


    INSIDER HOLDINGS: PASS

    CIM's insiders should own at least 10% (they own 11.70% ) 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. CIM's free cash flow of $0.52 per share passes this test.


    PROFIT MARGIN CONSISTENCY: FAIL

    The profit margin in the past must be consistently increasing. The profit margin of CIM has been inconsistent in the past three years (Current year: 59.09%, Last year: 28.69%, Two years ago: 85.67%), 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 CIM's case.


    CASH AND CASH EQUIVALENTS: FAIL

    CIM does not have a sufficiently large amount of cash, $177.71 million, on hand relative to its size. Although this criteria does not apply to companies of this size, we defined anything greater than $500 million in cash as having 'a lot of cash' to allow analysis of these companies. CIM will have more of a difficult time paying off debt (if it has any) or acquiring other companies than a company that passes this criterion.


    ACCOUNT RECEIVABLE TO SALES: PASS

    This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for CIM was 7.59% last year, while for this year it is 8.53%. 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): 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 (CIM's is 0.30), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. CIM passes this test.

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

    AVERAGE SHARES OUTSTANDING: PASS

    CIM has not been significantly increasing the number of shares outstanding within recent years which is a good sign. CIM currently has 188.0 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. CIM's sales of $934.1 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

    CIM does not pass the Daily Dollar Volume (DDV of $27.7 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. CIM with a price of $20.09 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

    CIM's income tax paid last year is not available. This could be the cause for some concern according to this strategy. However, because this is not a critical criterion, it should not make or break your investment decision. In order to ensure that you receive a fair analysis we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%).

    HUNTINGTON INGALLS INDUSTRIES INC

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

    Huntington Ingalls Industries, Inc. is a military shipbuilding company and a provider of professional services to partners in government and industry. The Company's business consists of the design, construction, repair and maintenance of nuclear-powered ships and non-nuclear ships for the United States Navy and coastal defense surface ships for the United States Coast Guard, as well as the refueling and overhaul and inactivation of nuclear-powered ships for the United States Navy. It operates through three segments: Ingalls Shipbuilding (Ingalls), Newport News Shipbuilding (Newport News) and Technical Solutions. Its Ingalls segment includes its non-nuclear ship design, construction, repair and maintenance businesses. Its Newport News includes all of its nuclear ship design, construction, overhaul, refueling, and repair and maintenance businesses. Its Technical Solutions segment provides a range of professional services to the governmental, energy, and oil and gas markets.


    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. HII, with a market cap of $9,622 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. HII, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 2.91, 5.18, 6.86, 8.36 and 12.14, 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. HII's Price/Sales ratio of 1.36, 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. HII, whose relative strength is 81, is in the top 50 and would pass this last criterion.

    NIC INC.

    Strategy: Growth Investor
    Based on: Martin Zweig

    NIC Inc. is a provider of digital government services that help governments use technology to provide services to businesses and citizens. The Company operates through Outsourced Portals segment. The Company offers its services through two channels: primary outsourced portal businesses, and software and services businesses. In the primary outsourced portal businesses, the Company enters into contracts with state and local governments to design, build, and operate Internet-based, enterprise-wide portals on their behalf. Its software and services businesses include its subsidiaries that provide software development and payment processing services, other than outsourced portal services, to state and local governments, as well as federal agencies. The Company's outsourced portal businesses include interactive government services (IGS), driver history records (DHR), Portal software development and services, and Portal management.


    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. EGOV's P/E is 24.38, based on trailing 12 month earnings, while the current market PE is 18.00. 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. EGOV's revenue growth is 10.40%, while it's earnings growth rate is 19.66%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, EGOV 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 (10.1%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (7.1%) of the current year. Sales growth for the prior must be greater than the latter. For EGOV 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. EGOV's EPS ($0.20) pass this test.


    QUARTERLY EARNINGS ONE YEAR AGO: PASS

    The EPS for the quarter one year ago must be positive. EGOV's EPS for this quarter last year ($0.14) 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. EGOV's growth rate of 42.86% 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 EGOV is 9.83%. This should be less than the growth rates for the 3 previous quarters, which are 35.71%, 17.65%, and 26.32%. EGOV 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, 26.00%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 42.86%, (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, 42.86% must be greater than or equal to the historical growth which is 19.66%. EGOV 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. EGOV, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.40, 0.49, 0.59, 0.63 and 0.84, passes this test.


    LONG-TERM EPS GROWTH: PASS

    One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. EGOV's long-term growth rate of 19.66%, 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. EGOV's Debt/Equity (0.00%) is not considered high relative to its industry (201.60%) 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 EGOV, this criterion has not been met (insider sell transactions are 375, while insiders buying number 4). 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.

    ADVANCED ENERGY INDUSTRIES, INC.

    Strategy: Growth Investor
    Based on: Martin Zweig

    Advanced Energy Industries, Inc. is a provider of engineered, precision power conversion, measurement and control solutions. The Company is engaged in designing, manufacturing, selling and supporting its power conversion products and solutions that transform power into various forms in various applications ranging from manufacturing and industrial processes to instrumentation, and test and measurement. It also provides repair and maintenance services for all of its products. Its process power systems include direct current (DC), pulsed DC, low frequency, high voltage, and radio frequency (RF) power supplies, matching networks, remote plasma sources for reactive gas applications and RF instrumentation. These power conversion systems refine, modify and control the raw electrical power from a utility and convert it into power that may be customized and is predictable and repeatable. Its power control modules and thermal instrumentation products are used in the semiconductor industry.


    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. AEIS's P/E is 22.56, based on trailing 12 month earnings, while the current market PE is 18.00. 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. AEIS's revenue growth is 5.87%, while it's earnings growth rate is 36.14%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, AEIS 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 (55.8%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (15.3%) of the current year. Sales growth for the prior must be greater than the latter. For AEIS 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. AEIS's EPS ($1.01) pass this test.


    QUARTERLY EARNINGS ONE YEAR AGO: PASS

    The EPS for the quarter one year ago must be positive. AEIS's EPS for this quarter last year ($0.28) 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. AEIS's growth rate of 260.71% 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 AEIS is 18.07%. This should be less than the growth rates for the 3 previous quarters which are -20.63%, 21.43% and 30.36%. AEIS 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, 9.14%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 260.71%, (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, 260.71% must be greater than or equal to the historical growth which is 36.14%. AEIS 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. AEIS, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.51, 1.47, 1.69, 2.05 and 2.92, 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. AEIS's long-term growth rate of 36.14%, 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. AEIS's Debt/Equity (0.00%) is not considered high relative to its industry (54.15%) and passes this test.


    INSIDER TRANSACTIONS: PASS

    A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For AEIS, this criterion has not been met (insider sell transactions are 299, while insiders buying number 86). 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.

    HIBBETT SPORTS, INC.

    Strategy: Price/Sales Investor
    Based on: Kenneth Fisher

    Hibbett Sports, Inc. operates sporting goods stores in small to mid-sized markets in the South, Southwest, Mid-Atlantic and Midwest regions of the United States. The Company operates approximately 1,040 stores in over 30 states, which consists of approximately 1,020 Hibbett Sports stores and over 20 Sports Additions athletic shoe stores. It sells merchandise of various brands, such as Nike, Under Armour, Reebok, adidas, Easton, The North Face and Yeti. It maintains a single wholesale and logistics facility in Alabaster, Alabama. Hibbett Sports stores offer a merchandising mix of localized apparel, footwear, equipment and accessories. Sports Additions store consists of a merchandising mix of athletic footwear, and caps and a limited assortment of apparel. Hibbett Team Sales, Inc. (Team), a subsidiary of the Company, is a supplier of customized athletic apparel, equipment and footwear to school athletic programs in Alabama and parts of Georgia, Florida and Mississippi.


    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. HIBB's P/S of 0.65 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. HIBB's Debt/Equity of 0.18% 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. HIBB 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 HIBB At this Point

    Is HIBB a "Super Stock"? NO


    PRICE/SALES RATIO: PASS

    The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.HIBB's P/S ratio of 0.65 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors.


    LONG-TERM EPS GROWTH RATE: FAIL

    This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. HIBB's inflation adjusted EPS growth rate of -0.63% fails the test.


    FREE CASH PER SHARE: FAIL

    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. HIBB's free cash per share is not available. Hence, an opinion cannot be rendered on this criterion at the current time.


    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. HIBB, whose three year net profit margin averages 7.27%, passes this evaluation.

    COOPER TIRE & RUBBER CO

    Strategy: Growth Investor
    Based on: Martin Zweig

    Cooper Tire & Rubber Company is a manufacturer and marketer of replacement tires. The Company specializes in the design, manufacture, marketing and sales of passenger car, light truck, medium truck, motorcycle, and racing tires. The Company operates through four segments: North America, Latin America, Europe, and Asia. The North America segment comprises its operations in the United States and Canada. The Americas Tire Operations segment manufactures and markets passenger car and light truck tires, for sale in the United States replacement markets. The Latin America segment comprises its operations in Mexico, Central America, and South America. The European segment has operations in the United Kingdom and the Republic of Serbia. Its the United Kingdom entity manufactures and markets passenger car, light truck, motorcycle and racing tires and tire retread material. As of December 31, 2016, the Company operated nine manufacturing facilities and 20 distribution centers in 10 countries.


    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. CTB's P/E is 9.51, based on trailing 12 month earnings, while the current market PE is 18.00. 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. CTB's revenue growth is -5.38%, while it's earnings growth rate is 15.38%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, CTB 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 (1.1%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-4%) of the current year. Sales growth for the prior must be greater than the latter. For CTB 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. CTB's EPS ($1.28) pass this test.


    QUARTERLY EARNINGS ONE YEAR AGO: PASS

    The EPS for the quarter one year ago must be positive. CTB's EPS for this quarter last year ($1.04) 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. CTB's growth rate of 23.08% 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 CTB is 7.69%. This should be less than the growth rates for the 3 previous quarters which are 52.17%, 23.30% and -3.23%. CTB 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, 21.51%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 23.08%, (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, 23.08% must be greater than or equal to the historical growth which is 15.38%. CTB 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. CTB, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 3.49, 1.73, 3.42, 3.69, and 4.51, 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. CTB's long-term growth rate of 15.38%, 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. CTB's Debt/Equity (30.28%) is not considered high relative to its industry (66.10%) 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 CTB, this criterion has not been met (insider sell transactions are 156, while insiders buying number 265). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.


    Watch List

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

    Ticker Company Name Current
    Score
    FIZZ NATIONAL BEVERAGE CORP. 60%
    MGA MAGNA INTERNATIONAL INC. (USA) 59%
    SIG SIGNET JEWELERS LTD. 57%
    FB FACEBOOK INC 57%
    KORS MICHAEL KORS HOLDINGS LTD 55%
    NLS NAUTILUS, INC. 53%
    MAN MANPOWERGROUP INC. 52%
    ESNT ESSENT GROUP LTD 48%
    AFSI AMTRUST FINANCIAL SERVICES INC 47%
    RACE FERRARI NV 46%



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