The Economy

The standout news for the U.S. economy since the last publication of the Hot List Newsletter was the impressive Non-Farm Payroll report for July. The topic now on investors' minds is whether the strong labor market will result in another interest rate hike by the Federal Reserve before the end of the year. With over a month until the Fed convenes next, though, there is plenty of time for expectations to gyrate and from one extreme to the other.

Economic activity in the manufacturing sector expanded for the fifth consecutive month in July, while the overall economy grew for the 86th consecutive month, according to the Institute for Supply Management. The group's June manufacturing index, PMI, registered 52.6%, a decrease of 0.6% from the June reading of 53.2%. The New Orders Index also decreased, falling 0.1% to 56.9%, while the Employment Index dropped 1% from the June reading to 49.4%. The Prices Index registered 55%, a decrease of 5.5% from the June reading, indicating higher raw materials prices for the fifth consecutive month. If the July PMI of 52.6% is annualized, it corresponds to a 3.0% increase in real annualized gross domestic product.

Economic activity in the non-manufacturing sector expanded in July for the 78th consecutive month, also according to the Institute for Supply Management. July's non-manufacturing (service sector) index, NMI, registered 55.5%, a decrease of 1% from the June reading. Despite the decrease in the Index, it remains well above the level that indicates expansion of the overall economy and reflects growth for the 84th consecutive month of such expansion, albeit at a slower pace. The New Orders Index rose 0.4% over that in June to 60.3%, while the Employment Index fell 1.3% in July to 51.4%. Prices paid by non-manufacturing organizations for purchased materials and services increased in July for the 4th consecutive month, as the Price Index was reported at 51.9% for July. The July NMI reading of 55.5% corresponds to a 2.6% increase in annualized gross domestic product.

Personal income rose 0.2% in June, according to the Commerce Department. Real disposable personal income rose 0.1%, while real personal consumption expenditures jumped 0.3%. The personal savings rate, personal saving as a percentage of disposable personal income, was 5.3%, its third monthly consecutive decline after a reading of 6.2% in March.

The Non-Farm Payroll Report released August 5th blew away estimates, as the Labor Department reported an increase of 255,000 jobs in July. The figures for May and June were also revised higher, with June increasing to +292,000 from +287,000, while the dismal May report was revised from +11,000 to +24,000. With these revisions, employment gains in May and June combined were 18,000 more than previously reported. Over the past 3 months, job gains have averaged 190,000 per month. The unemployment rate was unchanged at 4.9% in July and the number unemployed persons was essentially unchanged at 7.8 million. The number of people considered not in the labor force fell by 184,000. In July, average hourly earnings for all employees on private nonfarm payrolls increased by 8 cents to $25.69. Over the year, average hourly earnings have risen by 2.6 percent. The "U-6" rate, which unlike the headline number, takes into account those working part-time who want full-time work, and discouraged workers who have given up looking for a job, showed a slight increase, rising 0.1% to 9.7%. The strong Non-Farm Payroll data for June and July have eased the concerns caused by the weak report for May and have raised speculation of another rate hike by the Federal Reserve before the end of the year. The Fed's next meeting is scheduled for September 20-21.

The private sector added 179,000 jobs in July, according to payroll processor ADP. The firm also revised its June jobs number upward from 172,000 to 176,000. The service sector continues to drive the gains, adding 185,000 jobs, while the goods-producing sector extended a contraction, losing 6,000 jobs, following June losses of 28,000.

Overseas, China's trade balance report was dismal, as exports shrank by 4.4% year-over-year in July in dollar terms, following a 4.8% decline in June, according to data from the country's customs department. Chinese imports were worse, falling by 12.5% year-over-year, the biggest decline since February. This suggests China's domestic demand is faltering despite Beijing's efforts to stimulate its economy.

Oil prices fell below $40 in the two weeks since the last publication of the Hot List Newsletter, but are currently in the process of recovering and are near the $43.50 mark. Gas prices have essentially remained level. As of August 11th, a gallon of regular unleaded on average cost $2.13, down from $2.23 a month earlier. That's about 18% below where it was one year ago.

Portfolio Update: Hot List Outperforms by a Modest Margin

The past two weeks have been mixed for the stocks in the Hot List portfolio. Six outperformed the S&P 500 while four underperformed. Overall, though, the Hot List beat the performance of the S&P 500, which was up less than a percentage point as of mid-afternoon on August 11th.

Leading the way with a gain of 5.75%, was Paycom Software, Inc. (PAYC). Paycom Software, Inc. (Paycom) is a provider of cloud-based human capital management (HCM) software solution delivered as software as a service (SaaS). The Company's solution is based on a system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources (HR) management applications. PAYC has had impressive upside momentum in recent months, more than doubling since stabilizing in February. The Validea Momentum Investor model likes PAYC's annual earnings growth of 205.35%, based on the average of the 3 and 5 year historical eps growth rates using the current fiscal year eps estimate.

Not far behind with a gain of 5.3% was Valero Energy Corp. (VLO). Valero Energy Corporation (Valero), through Valero Energy Partners LP (VLP), owns, operates, develops and acquires crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets. The Company operates in two segments: refining and ethanol. Valero (market cap $24.414b) scores highly in the Peter Lynch-based model. It's P/E Growth Ratio is a very favorable 0.36. In addition, the issue's EPS growth rate of 23.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, is considered very good.

Other issues that produced gains and outperformed the market were Banco Macro SA (BMA), Natural Health Trends Corp. (NHTC), Cal-Maine Foods Inc. (CALM) and LGI Homes, Inc. (LGIH), which were up 2.7%, 1.8%, 3.3% and 1.8%, respectively.

As for losses, Hawaiian Holdings, Inc. (HA) fell 2.4%, the largest decline in the portfolio over the past two weeks. Hawaiian Holdings, Inc. is a holding company. The Company, through its subsidiary, Hawaiian Airlines, Inc. (Hawaiian) is engaged in the scheduled air transportation of passengers and cargo. No specific news appeared to be associated with the stock's decline.

Other stocks that produced losses in the portfolio were Anika Therapeutics (ANIK), NIC Inc. (EGOV) and Insteel Industries (IIIN).

Thus, over the past two weeks, during which the S&P 500 was up about 0.75%, the Hot List components were mixed. Overall, though, the portfolio outperformed, gaining 1.7%. In two weeks, we'll perform our regularly scheduled rebalancing. At that time, we will sell any holdings whose relative scores have fallen significantly and replace them with new stocks that score highly on my models.



Recommended Reading

In the Validea Blog, I have written numerous pieces on passive investment and its impact on the market's efficiency. I address this subject of indexing/passive investing and its impact on the market in another more recent Blog entry entitled, "Are Index Funds Passive Aggressive?" In a WealthManagement.com article from July, Bloomberg's Andrea Tan delved into the surging presence of index funds.

The article characterizes New York-based index compiler MSCI and others (including FTSE Russell and S&P Dow Jones) as becoming "the most important arbiters of where the world's stock investment flows." Tan differentiates index providers from active managers, who choose stocks in an attempt to "beat the market." The criteria used by indices such as MSCI are "measures of investability, such as market capitalization and daily volume, rather than anything purporting to generate above-average performance." The rise of index investing doesn't come without concerns. George Cooper, chief investment officer at Equitile Investments Ltd. in London stated that the trend could lead to market distortions where funds will "move into or out of shares because of their status in key indexes, instead of anything to do with the securities' underlying value."

This topic hits home to me as the Validea Hot List is the antithesis of a passive investment strategy. The goal of the Hot List is to beat the market -- not to mirror it. That's why the portfolio often diverges significantly from its benchmark (the S&P 500). This lack of correlation between the Hot List and its benchmark isn't simply an effort to be contrarian. It's really an indication, and reminder, that "the market" is much more than the "S&P 500". While the signature S&P index is very often used as a proxy for "the market", there are thousands of other stocks trading on U.S. exchanges; our Validea.com database includes more than 7,000 U.S.-traded stocks.


Guru Spotlight: Benjamin Graham

Another interesting read I found since the last publication of the Hot List Newsletter was a piece in which Steve Cohen's head performance coach talked about the money manager mindset. With the Olympics currently underway in Rio, it appears appropriate to discuss the mentality of an athlete and how those characteristics are in line with that of a successful money manager. In a Yahoo Finance article from mid-July, Dr. Gio Valiente, who recently joined Steve Cohen's $11 billion Point72 Asset Management as head performance coach, describes what he views as the similarities between coaching athletes and portfolio managers. "Once you think you have all the answers," Valiente says, "markets will punish you." He says that open-mindedness is a trait that all successful portfolio managers share: "You have to be willing to pivot and adapt and grow as a human being." But that doesn't necessarily guarantee success, he says. "You can do everything right and if the market is in an unwind you're going to lose money." Valiente also goes on to state, "There's confidence through arrogance and confidence through humility. We practice confidence through humility."

To be sure, each of the guru's I follow have come upon periods where performance suffered. Yet, each persevered and achieved highly successful careers. Benjamin Graham is a case in point. Graham's family lived quite well in his early years, as noted in my book, The Guru Investor. However, after his father's death, Graham's mother tried several business ventures, all of which failed. She even invested in the stock market before the famous 1907 financial panic, which wiped out her investment. This experience appeared to have left its mark on Graham, whose investment style was grounded in the belief that preserving capital was every bit as important - if not more important - than producing big gains.

The family's financial difficulties also may have had another impact on Graham - he worked during both high school and college to make money, demonstrating a work ethic that was a precursor to the intensity and dedication he showed when dealing with his client's money.

This mindset clearly came into play not long after Graham opened his own investment firm along with accountant Jerome Newman in 1926. This venture was marked by bad timing, as only three years later, the crash of 1929 occurred. Despite his skills and dedication, Graham's client lost money, as noted by Janet Lowe, an author who has written extensively about Graham.

While it took the Dow Jones Industrial Average 25 years to recover to the highs achieved before the crash, Graham's clients didn't have to wait nearly as long. After the crash, Graham and Newman worked for five years without compensation until their clients' fortunes were fully restored. "Once the Graham-Newman Co. recouped its portfolio of 1929-1930, Graham never again lost money for his clients," wrote Lowe. Living through his own family's financial difficulties, then seeing the effects of the stock market crash on his clients, undoubtedly served as lessons in humility for Graham and played important roles in shaping investment strategy, which is based on conservative, low-risk purchases.

Graham is known as the "Father of Value Investing." As explained in The Guru Investor, Graham didn't see an investment as something that could be turned into quick, easy profits, because anything that offers quick and easy profits also comes with substantial risk. Investment was instead something that took a lot of research and study. This concept clearly relates to the mindset of a successful athlete, as becoming superior in a chosen sport cannot be achieved through fly-by-night methods. To the contrary, consistent training and dedication are musts.

Graham's extensive research was aimed on companies' balance sheets and their fundamentals. How much debt did they carry? How did their stock price compare to the amount of per-share earnings they were generating? Did the firm have strong sales figures? This value-centric, company-focused approach may be used by a lot of investors today, but it was Graham who first popularized it. A key concept behind his approach was the "margin of safety" -- the difference between a stock's price and the value of its underlying business. Graham focused on stocks with high margins of safety (meaning their stocks were selling on the cheap compared to what he believed to be the intrinsic value of their businesses), because their already low prices offered significant downside protection.

My results with Graham's strategy reflects the success his methodology has achieved. Since 2003, my Benjamin Graham Value Investor model portfolio has returned 327.8%, outperforming the market by 211.4% using its optimal annual rebalancing period and ten stock portfolio size (see current holdings here). Staying disciplined in regard to your craft clearly produces a payoff, as the performance numbers above illustrate. In Graham's day, it took a lot of legwork and effort to analyze even one company's financials and fundamentals. But those who had the time, desire, and initiative to find and crunch the numbers could get a huge leg up on others. Humans are emotional and many, if not most, investors end up acting on short-term ups and downs far more than they should, selling good stocks that have had a bad day, or buying hot stocks that have had a good day, without regard to what truly matters: what those shares are really worth.

Disciplined investors do not react to the market's daily gyrations. When others bail on good stocks that are having short-term dips, those focused on the long term and a proven methodology can swoop in and pick up the bargains left behind. It's hard to do, because in the short term your portfolio can include some very unloved, declining stocks. But, as Graham's success has shown, over the long haul value and fundamentals win out. Stay disciplined to your craft, whether you are an investor or an athlete, and you tilt the odds greatly in your favor.

News about Validea Hot List Stocks

Cal-Maine Foods, Inc. (CALM): CALM announced that it has signed a letter of intent to acquire substantially all of the assets of Foodonics International, Inc. and its related entities doing business as Dixie Egg Company. The assets to be acquired, subject to the completion of this transaction, include commercial egg production and processing facilities with capacity for approximately 1.6 million laying hens and related feed production, milling and distribution facilities in Georgia, Alabama and Florida. Dixie Egg Company also has contract arrangements for an additional 1.5 million laying hens. In addition, Cal-Maine Foods will acquire the Egg-Land's Best, Inc. franchise with licensing rights for portions of certain markets in Alabama, Florida and Georgia as well as Puerto Rico, Bahamas and Cuba. The Company expects to close the transaction in early October.

NIC Inc. (EGOV): EVOG reported net income of $13.1 million and earnings per share of 20 cents on total revenues of $80.8 million for the three months ended June 30, 2016. In the second quarter of 2015, the Company reported net income of $11.3 million and earnings per share of 17 cents on total revenues of $75.8 million. Quarterly operating income increased 10 percent to a record $20.3 million, contributing to an operating margin of 25 percent for the current quarter, up from 24 percent in the prior year quarter. "NIC has dedicated more than two decades to driving government innovation," said Harry Herington, NIC Chief Executive Officer and Chairman of the Board. "It was great to see this focus on innovation and digital government services continue to drive solid financial results."

LGI Homes Inc. (LGIH): LGIH closed on 306 homes in July, down 1.7% from 311 a year earlier, the entry-level home builder reported Aug. 3rd. In June, LGI Homes' closings rose 7.3% to 355. In May they spiked 69.4% to 432 homes. Year-to-date closings are up 24.1% vs. a year earlier.

Paycom Software Inc. (PAYC): PAYC reported second-quarter non-GAAP profit and revenue that topped views, as the cloud software maker also raised its current-quarter and full-year revenue guidance. Paycom said Q2 EPS minus items jumped 110% to 21 cents from the year-earlier period, with revenue rising 51% to $73.9 million.

The Next Issue

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

Portfolio Holdings
Ticker Date Added Return
IIIN 7/29/2016 -0.9%
BMA 7/1/2016 3.0%
VLO 6/3/2016 -1.5%
LGIH 7/1/2016 8.7%
NHTC 7/29/2016 1.8%
HA 7/29/2016 -2.4%
EGOV 7/1/2016 6.3%
ANIK 5/6/2016 11.2%
CALM 7/29/2016 0.1%
PAYC 7/29/2016 6.7%


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

IIIN   |   BMA   |   VLO   |   LGIH   |   NHTC   |   HA   |   EGOV   |   ANIK   |   CALM   |   PAYC   |  

INSTEEL INDUSTRIES INC

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

Insteel Industries, Inc. (Insteel) is a manufacturer of steel wire reinforcing products for concrete construction applications. The Company manufactures and markets PC strand and welded wire reinforcement (WWR), including Engineered Structural Mesh (ESM), concrete pipe reinforcement (CPR) and standard welded wire reinforcement (SWWR). The Company's products are sold to manufacturers of concrete products that are used in nonresidential construction. Insteel has two wholly owned subsidiaries, Insteel Wire Products Company (IWP), an operating subsidiary, and Intercontinental Metals Corporation, an inactive subsidiary. The Company's concrete reinforcing products consist of PC strand and WWR. PC strand provides reinforcement for bridges, parking decks, buildings and other concrete structures. Welded Wire Reinforcement produces engineered reinforcing product for use in nonresidential and residential construction.


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. IIIN, with a market cap of $652 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. IIIN, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were -0.02, 0.10, 0.64, 0.89 and 1.16, 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. IIIN's Price/Sales ratio of 1.50, 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. IIIN, whose relative strength is 95, is in the top 50 and would pass this last criterion.

BANCO MACRO SA (ADR)

Strategy: Growth Investor
Based on: Martin Zweig

Banco Macro S.A. (the Bank) is a bank. The Bank offers traditional bank products and services to companies, including those operating in regional economies, as well as to individuals. The Bank offers savings and checking accounts, credit and debit cards, consumer finance loans (including personal loans), mortgage loans, automobile loans, overdrafts, credit-related services, home and car insurance coverage, tax collection, utility payments, automatic teller machines (ATMs) and money transfers. The Bank offers Plan Sueldo payroll services, lending, corporate credit cards, mortgage finance, transaction processing and foreign exchange. The Bank offers transaction services to its corporate customers, such as cash management, customer collections, payments to suppliers, payroll administration, foreign exchange transactions, foreign trade services, corporate credit cards and information services, such as its Datanet and Interpymes 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 10.40, based on trailing 12 month earnings, while the current market PE is 15.00. Therefore, it passes the first test.


REVENUE GROWTH IN RELATION TO EPS GROWTH: 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 42.07%, while it's earnings growth rate is 43.98%, 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 (49.9%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (80.2%) 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 ($2.11) 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 1,523.08% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: PASS

Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for BMA is 21.99%. This should be less than the growth rates for the 3 previous quarters, which are 228.57%, 23.08%, and 110.00%. 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, 100.00%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 1,523.08%, (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, 1,523.08% must be greater than or equal to the historical growth which is 43.98%. 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, 0.18, 0.28, 0.41 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 43.98%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.

VALERO ENERGY CORPORATION

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

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


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. VLO's P/S of 0.33 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. VLO's Debt/Equity of 36.50% 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. VLO 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 VLO At this Point

Is VLO 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.VLO's P/S ratio of 0.33 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors.


LONG-TERM EPS GROWTH RATE: PASS

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. VLO's inflation adjusted EPS growth rate of 21.41% passes the test.


FREE CASH PER SHARE: PASS

This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. VLO's free cash per share of 6.29 passes this criterion.


THREE YEAR AVERAGE NET PROFIT MARGIN: FAIL

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. VLO, whose three year net profit margin averages 3.09%, fails this evaluation.

LGI HOMES INC

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

LGI Homes, Inc. is a homebuilder. The Company is engaged in the design, construction, marketing and sale of new homes in markets in Texas, Arizona, Florida, Georgia, New Mexico, South Carolina, North Carolina, Colorado, Washington and Tennessee. The Company has five segments: the Texas division, the Southwest division, the Southeast division, the Florida division and the Northwest division. The Texas division includes homebuilding operations in Houston, Dallas/Fort Worth, San Antonio and Austin locations. The Southwest division includes homebuilding operations in Phoenix, Tucson, Albuquerque, Denver and Colorado Springs locations. The Southeast division includes homebuilding operations in Atlanta, Charlotte and Nashville locations. The Florida division includes homebuilding operations in Tampa, Orlando, Fort Myers and Jacksonville locations. The Northwest division includes homebuilding operations in Seattle location. Its product offerings include entry-level homes and move-up homes.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (11.86) relative to the growth rate (49.50%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for LGIH (0.24) 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. LGIH, whose sales are $735.9 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.


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 LGIH was 95.99% last year, while for this year it is 84.29%. Since inventory to sales has decreased from last year by -11.70%, LGIH passes this test.


EPS GROWTH RATE: PASS

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for LGIH is 49.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate.


TOTAL DEBT/EQUITY RATIO: FAIL

LGIH's Debt/Equity (111.05%) is above 80% and is considered very weak. Therefore, LGIH fails this test.


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 LGIH (-11.49%) 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 LGIH (-39.57%) 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.

NATURAL HEALTH TRENDS CORP.

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

Natural Health Trends Corp. is a direct-selling and e-commerce company. The Company, through its subsidiaries, sells personal care, wellness and quality of life products under the NHT Global brand. The Company offers a line of NHT Global branded products in approximately five categories, including wellness, herbal, beauty, lifestyle and home. Its wellness products include Premium Noni Juice, Triotein, Cluster X2, Children's Chewable MultiVitamin, ReStor Silver, ReStor Vital, HerBalance, FibeRich, Energin, Essential Probiotics, Omega 3 Essential Fatty Acids and Memory Burst. Its herbal products include LivaPro, Cordyceps Mycelia CS-4 and Purus. Its beauty products include Skindulgence 30-Minute Non-Surgical Facelift System, Time Restore Eye Cream and Essence, BioCell Mask, Soothe and Floraeda Hydrating Series. Its lifestyle products include Alura Lux by NHT Global, Valura, LaVie Vibrant Energy drink and Twin Slim Diet Jelly. Its home products include PurAir Air Purifier.


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. NHTC's profit margin of 16.73% 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. NHTC, with a relative strength of 77, fails this test.


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

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for NHTC (9.18% for EPS, and 15.30% for Sales) are not good enough to pass.


INSIDER HOLDINGS: PASS

NHTC's insiders should own at least 10% (they own 16.59% ) 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. NHTC's free cash flow of $6.38 per share passes this test.


PROFIT MARGIN CONSISTENCY: PASS

NHTC's profit margin has been consistent or even increasing over the past three years (Current year: 17.84%, Last year: 16.35%, Two years ago: 7.79%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.


R&D AS A PERCENTAGE OF SALES: FAIL

NHTC did not have any R&D expenditures for the current year which is unacceptable. NHTC could be jepordizing the future in order to boost current EPS numbers.


CASH AND CASH EQUIVALENTS: PASS

NHTC's level of cash $104.9 million passes this criteria. If a company is a cash generator, like NHTC, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.


INVENTORY TO SALES: PASS

This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for NHTC was 3.02% last year, while for this year it is 3.95%. Although the inventory to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive.


ACCOUNT RECEIVABLE TO SALES: PASS

This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for NHTC was 0.09% last year, while for this year it is 0.02%. Since the AR to sales has been flat, NHTC passes this test.


LONG TERM DEBT/EQUITY RATIO: PASS

NHTC's trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don't need to borrow money in order to grow.


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

The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (NHTC's is 0.06), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. NHTC passes this test.

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

AVERAGE SHARES OUTSTANDING: PASS

NHTC has not been significantly increasing the number of shares outstanding within recent years which is a good sign. NHTC currently has 11.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.


SALES: PASS

Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. NHTC's sales of $309.2 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". NHTC passes the sales test.


DAILY DOLLAR VOLUME: PASS

NHTC passes the Daily Dollar Volume (DDV of $4.8 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf."


PRICE: PASS

This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. NHTC with a price of $34.18 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

NHTC's income tax paid expressed as a percentage of pretax income either this year (1.15%) or last year (1.31%) 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%).

HAWAIIAN HOLDINGS, INC.

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

Hawaiian Holdings, Inc. is a holding company. The Company, through its subsidiary, Hawaiian Airlines, Inc. (Hawaiian) is engaged in the scheduled air transportation of passengers and cargo. The Company offers transportation amongst the Hawaiian Islands (the Neighbor Island routes); between the Hawaiian Islands and certain cities in the United States (the North America routes), and between the Hawaiian Islands and the South Pacific, Australia, New Zealand and Asia (the International routes), collectively referred to as the Company's Scheduled Operations. It offers non-stop service to Hawai'i from over 10 the United States gateway cities. It also provides approximately 160 daily flights between the Hawaiian Islands. It operates various charter flights. The Company's fleet consists of over 20 Boeing 717-200 aircraft for the Neighbor Island routes, and approximately eight Boeing 767-300 aircraft and over 20 Airbus A330-200 aircraft for the North America, International and charter routes.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (10.47) relative to the growth rate (25.08%), based on the average of the 3 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for HA (0.42) 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. HA, whose sales are $2,351.7 million, needs to have a P/E below 40 to pass this criterion. HA's P/E of (10.47) 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 HA was 0.78% last year, while for this year it is 0.83%. Since inventory to sales has not changed appreciably, HA passes this test.


EPS GROWTH RATE: PASS

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for HA is 25.1%, based on the average of the 3 and 5 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: FAIL

HA's Debt/Equity (103.51%) is above 80% and is considered very weak. Therefore, HA fails this test.


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 HA (13.12%) 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 HA (1.35%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.

NIC INC.

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

NIC Inc. is a provider of digital government services that help governments use technology. The Company operates through Outsourced Portals segment. The Other Software & Services category includes its subsidiaries that provide software development and services, other than outsourced portal services, to state and local governments, as well as federal agencies. The Company offers its services through two channels: primary outsourced portal businesses, and software & services businesses. In its primary outsourced portal businesses, it enters into long-term contracts with state and local governments to design, build, and operate Internet-based, enterprise-wide portals on their behalf. These portals consist of Websites and applications that the Company has built to allow businesses and citizens to access government information online and secure transactions, such as applying for a permit, retrieving government records, or filing a government-mandated form or report.


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. EGOV's profit margin of 15.62% 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. EGOV, with a relative strength of 79, fails this test.


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

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for EGOV (17.65% for EPS, and 6.60% for Sales) are not good enough to pass.


INSIDER HOLDINGS: FAIL

EGOV's insiders should own at least 10% (they own 4.39%) of the company's outstanding shares. This does not satisfy the minimum requirement, and companies that do not pass this criteria are less attractive.


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. EGOV's free cash flow of $0.69 per share passes this test.


PROFIT MARGIN CONSISTENCY: PASS

EGOV's profit margin has been consistent or even increasing over the past three years (Current year: 14.36%, Last year: 14.36%, Two years ago: 12.85%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.


R&D AS A PERCENTAGE OF SALES: FAIL

EGOV did not have any R&D expenditures for the current year which is unacceptable. EGOV could be jepordizing the future in order to boost current EPS numbers.


CASH AND CASH EQUIVALENTS: PASS

EGOV's level of cash $98.4 million passes this criteria. If a company is a cash generator, like EGOV, 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 EGOV was 21.12% last year, while for this year it is 27.48%. Although the AR to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive.


LONG TERM DEBT/EQUITY RATIO: PASS

EGOV's trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don't need to borrow money in order to grow.


"THE FOOL RATIO" (P/E TO GROWTH): 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. EGOV's PEG Ratio of 1.96 is excessively high.

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

AVERAGE SHARES OUTSTANDING: PASS

EGOV has not been significantly increasing the number of shares outstanding within recent years which is a good sign. EGOV currently has 66.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.


SALES: PASS

Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. EGOV's sales of $305.4 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". EGOV passes the sales test.


DAILY DOLLAR VOLUME: PASS

EGOV passes the Daily Dollar Volume (DDV of $6.8 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf."


PRICE: PASS

This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. EGOV with a price of $23.27 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.


INCOME TAX PERCENTAGE: PASS

EGOV's income tax paid expressed as a percentage of pretax income this year was (37.62%) and last year (38.03%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.

ANIKA THERAPEUTICS INC

Strategy: Growth Investor
Based on: Martin Zweig

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


P/E RATIO: PASS

The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. ANIK's P/E is 21.40, based on trailing 12 month earnings, while the current market PE is 15.00. Therefore, it passes the first test.


REVENUE GROWTH IN RELATION TO EPS GROWTH: FAIL

Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. ANIK's revenue growth is 9.81%, while it's earnings growth rate is 37.67%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, ANIK fails this criterion.


SALES GROWTH RATE: 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 (16.1%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (43.6%) of the current year. Sales growth for the prior must be greater than the latter. For ANIK 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. ANIK's EPS ($0.57) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. ANIK's EPS for this quarter last year ($0.51) pass this test.


POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS

The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. ANIK's growth rate of 11.76% 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 ANIK is 18.84%. This should be less than the growth rates for the 3 previous quarters, which are 37.50%, 41.18%, and 95.65%. ANIK 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: FAIL

If the growth rate of the prior three quarter's earnings, 50.88%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 11.76%, (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 ANIK is 11.8%, and it would therefore fail this test.


EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: FAIL

The EPS growth rate for the current quarter, 11.76% must be greater than or equal to the historical growth which is 37.67%. Since this is not the case ANIK would therefore fail this test.


EARNINGS PERSISTENCE: FAIL

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. ANIK, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.62, 0.82, 1.39, 2.51, and 2.01, fails this test.


LONG-TERM EPS GROWTH: PASS

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. ANIK's long-term growth rate of 37.67%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.


TOTAL DEBT/EQUITY RATIO: PASS

A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. ANIK's Debt/Equity (0.00%) is not considered high relative to its industry (120.98%) and passes this test.


INSIDER TRANSACTIONS: PASS

A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For ANIK, this criterion has not been met (insider sell transactions are 42, while insiders buying number 37). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.

CAL-MAINE FOODS INC

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

Cal-Maine Foods, Inc. is a producer and marketer of shell eggs in the United States. The Company operates through the segment of production, grading, packaging, marketing and distribution of shell eggs. It offers shell eggs, including specialty and non-specialty eggs. It classifies cage free, organic and brown eggs as specialty products. It classifies all other shell eggs as non-specialty products. The Company markets its specialty shell eggs under the brands, including Egg-Land's Best, Land O' Lakes, Farmhouse and 4-Grain. The Company, through Egg-Land's Best, Inc. (EB), produces, markets and distributes Egg-Land's Best and Land O' Lakes branded eggs. It markets cage-free eggs under its Farmhouse brand and distributes them throughout southeast and southwest regions of the United States. It markets organic, wholesome, cage-free, vegetarian and omega-3 eggs under its 4-Grain brand. It also produces, markets and distributes private label specialty shell eggs to customers.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (6.42) relative to the growth rate (52.80%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for CALM (0.12) 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. CALM, whose sales are $1,908.7 million, needs to have a P/E below 40 to pass this criterion. CALM's P/E of (6.42) 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 CALM was 9.28% last year, while for this year it is 8.11%. Since inventory to sales has decreased from last year by -1.17%, CALM passes this test.


EPS GROWTH RATE: FAIL

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 CALM is 52.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered too fast.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for CALM (2.79%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for CALM (9.11%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for CALM (18.90%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.

PAYCOM SOFTWARE INC

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

Paycom Software, Inc. (Paycom) is a provider of cloud-based human capital management (HCM) software solution delivered as software as a service (SaaS). The Company's solution is based on a system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources (HR) management applications. Talent acquisition includes applicant tracking, on-boarding, e-verify and tax credit services. Time and labor management includes time and attendance, scheduling/schedule exchange, time-off requests, labor allocation and labor management reports/push reporting. Payroll includes payroll and tax management, Paycom pay, expense management, garnishment management and GL Concierge. Talent management includes employee self-service, executive dashboard and Paycom learning. Human resources management includes document and task management, government and compliance, and benefits administration.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (78.77) relative to the growth rate (205.35%), based on the average of the 3 and 5 year historical eps growth rates using the current fiscal year eps estimate, 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 PAYC (0.38) 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. PAYC, whose sales are $284.5 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.


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 PAYC was 0.13% last year, while for this year it is 0.49%. 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 (0.35%) is below 5%.


EPS GROWTH RATE: FAIL

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 PAYC is 205.3%, based on the average of the 3 and 5 year historical eps growth rates using the current fiscal year eps estimate, which is considered too fast.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for PAYC (22.72%) to be acceptable (equity is three to ten times debt). This ratio is one quick way to determine the financial strength of the company.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for PAYC (0.91%) 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 PAYC (0.75%) 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.


Watch List

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

Ticker Company Name Current
Score
GGAL GRUPO FINANCIERO GALICIA S.A. (ADR) 70%
CAL CALERES INC 68%
BANC BANC OF CALIFORNIA INC 53%
PII POLARIS INDUSTRIES INC. 51%
SWHC SMITH & WESSON HOLDING CORP 51%
SAFM SANDERSON FARMS, INC. 47%
LPL LG DISPLAY CO LTD. (ADR) 43%
MKTX MARKETAXESS HOLDINGS INC. 41%
SIMO SILICON MOTION TECHNOLOGY CORP. (ADR) 41%
THO THOR INDUSTRIES, INC. 40%



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