Market & Economy

U.S. markets greeted 2018 with their strongest start since 2006, driven by optimism for corporate profits and the benefits of corporate tax cuts. Several large companies have announced plans to pay employee bonuses and invest as a result of the tax cuts, and analysts are expecting companies to report strong profits and improving outlooks for the coming months. The Dow Jones industrial average is trading at a multiple of 20.5 to TTM earnings. The Standard & Poor's 500 trades at a multiple of 22.5. Energy is the strongest sector to start the year, followed by industrials, while utilities lag.

Some positive numbers:

  1. Unemployment is at a low 4.1% and American employers have cut the fewest number of jobs in one year in almost three decades. Challenger Gray & Christmas' annual survey found a total of 418,700 job cuts at U.S. companies last year, down 20% from the prior year and the lowest number since 1990.
  2. Homeowners with mortgages had a collective $5.5 trillion in available home equity by the end of the third quarter, the most at their disposal ever according to a study by Black Knight Data & Analytics. That gives homeowners an extra reserve to spend on home improvement or other projects.
  3. Business spending soared last year as companies looked forward to big tax cuts put in place in late December. New orders for U.S.-made goods rose in November for the fourth straight month, and factory goods orders rose 1.3 percent with demand for transportation and electrical equipment.
  4. December was the 96th consecutive month of growth in the service sector even though the activity measure slipped to 55.9 from the forecast of 57.6 by economists surveyed by Reuters. A reading above 50 means the sector is expanding.

Some not-so-positive numbers:

  1. The U.S. trade deficit increased more than expected in November and was at its highest level since January 2012 at $50.5 billion, the Commerce Department said. That could mean trade will subtract from economic growth in the fourth quarter.
  2. Credit card debt hit a new record in November, topping $1 trillion and edging past the previous high recorded in April 2008. The Federal Reserve data show revolving credit has risen nearly 6% in the last year. That reflects consumer confidence but could also signal trouble in an economic downturn.
  3. Oil prices have rebounded to four-year highs, pushed by growing demand and deliberate output limits by the world's biggest producers. Political unrest could lead to further disruptions in the supply chain, such as protests in big oil countries like Iran and Venezuela.

Recommended Reading:

Investors looking for a fresh start might take a look at where they are over- and under- exposed. The market gain may have over-weighted them to the high-flying tech sector, which has become increasingly influential in the indexes. And bond fund holdings may be loaded up with high-yield, which is closely correlated to the equity market. Microcap orphan stocks may be one area of opportunity. In case you missed them, here are some recent articles and blog posts:

Over-teched? Investors may own more large tech stocks than they thought they did considering the sector's increased contribution to the overall index. As tech stocks grow, their contribution to the S&P as a percentage also grows, topping out near 24% last year. Read more

Behavioral investing Meet the managers of a fund that was founded on the principals of behavioral finance, namely that investors make mistakes. They look for small cap companies with significant insider buying and outsider selling as a sign that the crowd is wrong. Read more

Market Timing Over the long-term, timing the markets is extremely difficult, as most investing pros will tell you. Investors need to know the optimal time to enter and exit a given trade, and reading trends can be tricky. Bear markets sometimes don't reveal themselves right away. A sustained bull rally can keep jittery investors on the sidelines too long. Read more

Buyback mania The new corporate tax cuts will encourage companies to move money back home from abroad and use their piles of cash to buy back stock. But investors shouldn't expect that to be enough to sustain the long-lasting bull market, writes Mark Hulbert. Read more

Orphan stocks The WSJ's Jason Zweig recently wrote about the positives to investing beyond the major indexes. Orphan stocks, or those that aren't included in an index for various reasons, are one place to look. They are often shares of small companies and can be volatile but have outperformed. Read more

Active v. Passive Active managers are beating the indexes by loading up on junk bonds, according to AQR Capital, in a recent Bloomberg piece. Since high-yield is closely correlated to the equity market, this is stripping away the diversification benefit of bond funds. Read more

Ivy Blues Harvard's endowment wrote down its nearly $4 billion natural resources holdings by more than 25% last year, making the fund the worst performer of the Ivy League, according to The Wall Street Journal. Read more

Correction soon? In the first week of December, U.S. stocks reached their most overbought level in two decades, Bloomberg reported, a sure sign that a market pullback is coming. Read more Speaking of which, "bubble" was a top Google finance search term. Read more

Performance update

Since our last newsletter, the S&P 500 returned 3.0%, while the Hot List returned 0.4%. So far in 2018, the portfolio has returned 1.5% vs. 3.5% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 269.0% vs. the S&P's 176.6% gain.

The Fallen

As we rebalance the Validea Hot List, 4 stocks leave our portfolio. These include: Universal Forest Products, Inc. (UFPI), Magna International Inc. (Usa) (MGA), Banco Macro Sa (Adr) (BMA) and Sanderson Farms, Inc. (SAFM).

The Keepers

6 stocks remain in the portfolio. They are: Cooper Tire & Rubber Co (CTB), Thor Industries, Inc. (THO), Toll Brothers Inc (TOL), Netease Inc (Adr) (NTES), Signet Jewelers Ltd. (SIG) and Lgi Homes Inc (LGIH).

The New Additions

We are adding 4 stocks to the portfolio. These include: United Therapeutics Corporation (UTHR), Petmed Express Inc (PETS), Foot Locker, Inc. (FL) and Ipg Photonics Corporation (IPGP).

Latest Changes

Additions  
UNITED THERAPEUTICS CORPORATION UTHR
PETMED EXPRESS INC PETS
FOOT LOCKER, INC. FL
IPG PHOTONICS CORPORATION IPGP
Deletions  
UNIVERSAL FOREST PRODUCTS, INC. UFPI
MAGNA INTERNATIONAL INC. (USA) MGA
BANCO MACRO SA (ADR) BMA
SANDERSON FARMS, INC. SAFM

Stock Market Lessons of 2017

Despite lots of talk about the bull market nearing its end and signals pointing to a correction in the near-term, stocks were off to their best start in more than a decade as the new year began. Tax reform in Washington and strong corporate earnings, combined with a Federal Reserve that is expected to be conservative about raising interest rates, has fueled an optimism about the markets. That same optimism lifted the major indexes to dizzying heights last year, when we learned a few things about the markets. Here's a synopsis:

Bull markets don't die of old age. Indeed, this one will mark its ninth anniversary in March and seems determined to push beyond that, despite what analysts say. It's proof that markets need a catalyst to change and shift a bull market into a bear market. What could it take? A too-aggressive Fed on handling interest rates, which could tip the economy into recession, or a disruptive world event, like a further shake up in Europe.

Investing outside the U.S. is important. Any investing pro will emphasize the importance of diversification but many investors get caught up in the U.S. stock market forgetting that there are often better growth opportunities abroad. Europe is seeing some of the fastest growth in seven years and a weaker U.S. dollar could help emerging market economies.

Value investing when growth stocks are hot is a lonely business. Growth, perhaps as symbolized in the flashy tech stocks that have dominated the headlines, has been beating value for over a decade now. Every time it looks like the rotation back to value is beginning, it vanishes. The performance spread between value and growth is at levels not seen since the 1990s. Is that a sign the end is near? Nobody knows. Joel Greenblatt has written about how to pick good companies selling for a bargain price buy using a "magic formula" of return on capital and earnings yield. But even his successful track record won't prevent investors from dumping and running when the returns aren't meeting expectations - and that is bound to happen in any manager's professional life. Investors who stick with a strategy through the lean times are ultimately rewarded, as is the message in Greenblatt's 2005 "The Little Book That Beats the Market." The trick is to pick a strategy and stick with it. And patience is definitely not what value investors want to be hearing these days.

Volatility isn't as evil as it sounds. One of the most striking aspects of the market in the last year as been the record-low volatility, a combination of trader sentiment (they aren't worried about an imminent drop in the S&P), economic growth with low interest rates, and low correlations. The average daily change in the S&P 500 for the year was the lowest it has been since the 1960s. And it was the first year ever where the S&P 500 gained each month. But a little volatility can go a long way. It can help reward investors for taking greater risks and it can create opportunities to entice investors to the market.

The lesson from all of these trends is that investor success begins with finding an approach that best fits that investor's needs and sticking with it no matter what direction the market takes. The right move too early can look like the wrong move, no doubt, and market timing is almost always a frustrating exercise. A constant is that when something is wildly out of line with the average it will eventually return, and the longer that situation lasts, the more likely the reversion. Patience and discipline will pay off.

Newcomers to the Hot List

Foot Locker Inc. (FL)

A retailer of athletic shoes and apparel both online and in stores. It passes the tests of gurus Kenneth Fisher, Peter Lynch and Benjamin Graham.

IPG Photonics Corp. (IPGP)

A developer and maker of fiber lasers and amplifiers used in communications and medical applications. It passes the test of guru Martin Zweig and also scores well on Validea's own momentum model.

PetMed Express Inc. (PETS)

A pet pharmacy that sells drugs and other health products for dogs and cats direct to consumers. It scores highly on the Validea momentum-tracking model.

United Therapeutics Corp. (UTHR)

A biotech company focused on developing therapies for a rare lung disease and other ailments. It passes the test of gurus Joel Greenblatt, Peter Lynch and Benjamin Graham as well as Validea's momentum model.

News on Hot List Stocks

LGI Homes announced the opening of its Skyline Estates development in Dallas.

Signet Jewelers' same day sales fell 3% over the holiday season and the company offered soft guidance for 2018, sending its stock down 7% on Wednesday.

United Therapeutics will license Corsair Pharma's portfolios of treprostinil prodrugs and make an equity investment in the private biotech company.

Portfolio Holdings
Ticker Date Added Return
NTES 11/17/2017 -10.9%
IPGP 1/12/2018 TBD
UTHR 1/12/2018 TBD
LGIH 11/17/2017 20.9%
TOL 12/15/2017 8.6%
CTB 9/22/2017 12.0%
FL 1/12/2018 TBD
THO 10/20/2017 18.7%
PETS 1/12/2018 TBD
SIG 10/20/2017 -16.3%


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

NTES   |   IPGP   |   UTHR   |   LGIH   |   TOL   |   CTB   |   FL   |   THO   |   PETS   |   SIG   |  

NETEASE INC (ADR)

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

NetEase, Inc. (NetEase) is a technology company. The Company operates an interactive online community in China and is a provider of Chinese language content and services through its online games, Internet media, e-mail, e-commerce and other businesses. The Company operates through three segments: Online Game Services; Advertising Services, and E-mail, E-commerce and Others. Its online games business primarily focuses on offering personal computer (PC)-client massively multi-player online role-playing games (PC-client MMORPGs), as well as mobile games to the Chinese market. The NetEase Websites provide Internet users with Chinese language online services centered over three core service categories, which include content, community and communication. Its online advertising offerings include banner advertising, direct e-mail, sponsored special events, games, contests and other activities. It offers free and fee-based premium e-mail services to its individual users and corporate users.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (21.52) relative to the growth rate (32.44%), 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 NTES (0.66) makes it 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. NTES, whose sales are $7,942.8 million, needs to have a P/E below 40 to pass this criterion. NTES's P/E of (21.52) is considered acceptable.


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 NTES is 32.4%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for NTES (12.74%) 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 NTES (4.20%) 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 NTES (1.98%) 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.

IPG PHOTONICS CORPORATION

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

IPG Photonics Corporation is a developer and manufacturer of a line of fiber lasers, fiber amplifiers, diode lasers, laser systems and optical accessories that are used for various applications. The Company offers a line of lasers and amplifiers, which are used in materials processing, communications and medical applications. The Company sells its products globally to original equipment manufacturers (OEMs), system integrators and end users. The Company's manufacturing facilities are located in the United States, Germany and Russia. The Company offers laser-based systems for certain markets and applications. Its products are designed to be used as general-purpose energy or light sources. Its product line includes High-Power Ytterbium CW (1,000-100,000 Watts), Mid-Power Ytterbium CW (100-999 Watts), Pulsed Ytterbium (0.1 to 200 Watts), Pulsed and CW, Quasi-CW Ytterbium (100-4,500 Watts), Erbium Amplifiers and Transceivers.


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. IPGP's profit margin of 27.84% passes this test.


RELATIVE STRENGTH: PASS

The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. IPGP, with a relative strength of 95, satisfies 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 IPGP (63.57% for EPS, and 47.59% for Sales) are good enough to pass.


INSIDER HOLDINGS: PASS

IPGP's insiders should own at least 10% (they own 33.35% ) 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. IPGP's free cash flow of $3.07 per share passes this test.


PROFIT MARGIN CONSISTENCY: FAIL

The profit margin in the past must be consistently increasing. The profit margin of IPGP has been inconsistent in the past three years (Current year: 25.92%, Last year: 26.87%, Two years ago: 26.04%), which is unacceptable. This inconsistency will carryover directly to the company's bottom line, or earnings per share.


R&D AS A PERCENTAGE OF SALES: PASS

IPGP is either maintaining the same levels of R&D expenditures(currently $78.6 million) or increasing these levels which is a good sign. This allows the company to develop the superior technology and new products that will put everyone else out of business. This criterion is particularly important for high-tech and medical stocks because they are so R&D dependant.


CASH AND CASH EQUIVALENTS: PASS

IPGP's level of cash $830.6 million passes this criteria. If a company is a cash generator, like IPGP, 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 IPGP was 22.61% last year, while for this year it is 23.75%. 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 IPGP was 16.70% last year, while for this year it is 15.49%. Since the AR to sales is decreasing by -1.20% the stock passes this criterion.


LONG TERM DEBT/EQUITY RATIO: PASS

IPGP's trailing twelve-month Debt/Equity ratio (2.36%) is a little higher than what this methodology is looking for, but is still at an acceptable level. The superior companies that you are looking for don't need to borrow money in order to grow. This company has borrowed very little which is still OK.


"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. IPGP's PEG Ratio of 2.42 is excessively high.

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

AVERAGE SHARES OUTSTANDING: PASS

IPGP has not been significantly increasing the number of shares outstanding within recent years which is a good sign. IPGP currently has 55.0 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. IPGP's sales of $1,328.0 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years.


DAILY DOLLAR VOLUME: FAIL

IPGP does not pass the Daily Dollar Volume (DDV of $149.7 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. IPGP with a price of $258.33 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

IPGP's income tax paid expressed as a percentage of pretax income this year was (28.88%) and last year (29.15%) 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.

UNITED THERAPEUTICS CORPORATION

Strategy: Growth Investor
Based on: Martin Zweig

United Therapeutics Corporation is a biotechnology company. The Company is focused on the development and commercialization of products for the treatment of chronic and life-threatening conditions. The Company markets and sells four commercial therapies in the United States to treat pulmonary arterial hypertension (PAH): Remodulin (treprostinil) Injection; Tyvaso (treprostinil) Inhalation Solution (Tyvaso); Orenitram (treprostinil) Extended-Release Tablets (Orenitram); and Adcirca (tadalafil) Tablets (Adcirca). The Company markets and sells an oncology product in the United States, Unituxin (dinutuximab) Injection (Unituxin), which is approved for treatment of neuroblastoma. The Company is also engaged in early-stage research and development of a number of organ transplantation-related technologies.


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. UTHR's P/E is 12.60, based on trailing 12 month earnings, while the current market PE is 27.00. 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. UTHR's revenue growth is 14.69%, while it's earnings growth rate is 42.31%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, UTHR 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 (9.1%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (7.8%) of the current year. Sales growth for the prior must be greater than the latter. For UTHR 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. UTHR's EPS ($6.26) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. UTHR's EPS for this quarter last year ($3.50) 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. UTHR's growth rate of 78.86% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: FAIL

Compare the earnings growth rate of the past four quarters with long-term EPS growth rate. Earnings growth in the past 4 quarters should be at least half of the long-term EPS growth rate. A stock should not be considered if it posted several quarters of skimpy earnings. UTHR had 2 quarters of skimpy growth in the last 2 years.


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, -55.16%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 78.86%, (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, 78.86% must be greater than or equal to the historical growth which is 42.31%. UTHR 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. UTHR, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 5.71, 3.28, 6.28, 12.72, and 15.25, 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. UTHR's long-term growth rate of 42.31%, 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. UTHR's Debt/Equity (11.97%) is not considered high relative to its industry (114.91%) 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 UTHR, this criterion has not been met (insider sell transactions are 2,062, while insiders buying number 1,200). 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.

LGI HOMES INC

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

LGI Homes, Inc. is a homebuilder and land developer. 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 operates through 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.


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. LGIH's profit margin of 9.26% passes this test.


RELATIVE STRENGTH: PASS

The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. LGIH, with a relative strength of 95, satisfies 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 LGIH (62.79% for EPS, and 69.16% for Sales) are good enough to pass.


INSIDER HOLDINGS: PASS

LGIH's insiders should own at least 10% (they own 13.59% ) 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: FAIL

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. LGIH's free cash flow of $-4.94 per share fails this test.


PROFIT MARGIN CONSISTENCY: PASS

LGIH's profit margin has been consistent or even increasing over the past three years (Current year: 8.95%, Last year: 8.38%, Two years ago: 7.36%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.


R&D AS A PERCENTAGE OF SALES: NEUTRAL

This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in LGIH's case.


CASH AND CASH EQUIVALENTS: FAIL

LGIH does not have a sufficiently large amount of cash, $49.52 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. LGIH 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.


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 LGIH was 84.29% last year, while for this year it is 85.61%. 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 LGIH was 2.75% last year, while for this year it is 2.04%. Since the AR to sales is decreasing by -0.71% the stock passes this criterion.


LONG TERM DEBT/EQUITY RATIO: FAIL

LGIH's trailing twelve-month Debt/Equity ratio (103.90%) is too high, according to this methodology. You can find other more superior companies that do not have to borrow money in order to grow.


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

The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (LGIH's is 0.28), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. LGIH passes this test.

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

AVERAGE SHARES OUTSTANDING: PASS

LGIH has not been significantly increasing the number of shares outstanding within recent years which is a good sign. LGIH currently has 24.0 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. LGIH's sales of $1,089.8 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years.


DAILY DOLLAR VOLUME: PASS

LGIH passes the Daily Dollar Volume (DDV of $24.8 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. LGIH with a price of $76.82 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

LGIH's income tax paid expressed as a percentage of pretax income this year was (33.99%) and last year (34.19%) 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.

TOLL BROTHERS INC

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

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


DETERMINE THE CLASSIFICATION:

TOL is considered a "True Stalwart", according to this methodology, as its earnings growth of 18.73% lies within a moderate 10%-19% range and its annual sales of $5,815 million are greater than the multi billion dollar level. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. TOL is attractive if TOL can hold its own during a recession.


INVENTORY TO SALES: PASS

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


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

The Yield-adjusted P/E/G ratio for TOL (0.84), based on the average of the 3, 4 and 5 year historical eps growth rates, is O.K.


EARNINGS PER SHARE: PASS

The EPS for a stalwart company must be positive. TOL's EPS ($3.18) would satisfy this criterion.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for TOL (71.06%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for TOL should be good enough to compensate.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for TOL (10.15%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for TOL (-29.33%) 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.

COOPER TIRE & RUBBER CO

Strategy: Value Investor
Based on: Benjamin Graham

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.


SECTOR: PASS

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


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $1 billion. CTB's sales of $2,881.5 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: PASS

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. CTB's current ratio of 2.67 passes the test.


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

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for CTB is $296.1 million, while the net current assets are $885.3 million. CTB passes this test.


LONG-TERM EPS GROWTH: FAIL

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


P/E RATIO: PASS

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. CTB's P/E of 10.22 (using the current PE) passes this test.


PRICE/BOOK RATIO: PASS

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. CTB's Price/Book ratio is 1.74, while the P/E is 10.22. CTB passes the Price/Book test.

FOOT LOCKER, INC.

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

Foot Locker, Inc. is a retailer of shoes and apparel. The Company operates through two segments: Athletic Stores and Direct-to-Customers. The Company is an athletic footwear and apparel retailer, which include businesses, such as include Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep and SIX:02. The Direct-to-Customers segment is multi-branded and sells directly to customers through Internet and mobile sites and catalogs. The Direct-to-Customers segment operates the Websites for eastbay.com, final-score.com, eastbayteamsales.com and sp24.com. Additionally, this segment includes the Websites, both desktop and mobile, aligned with the brand names of its store banners (footlocker.com, ladyfootlocker.com, six02.com kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu, runnerspoint.com and sidestep-shoes.com).


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. FL's P/S of 0.73 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. FL's Debt/Equity of 4.74% 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. FL 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 FL At this Point

Is FL a "Super Stock"? YES


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.FL's P/S ratio of 0.73 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%. FL's inflation adjusted EPS growth rate of 17.52% 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. FL's free cash per share of 2.98 passes this criterion.


THREE YEAR AVERAGE NET PROFIT MARGIN: PASS

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. FL, whose three year net profit margin averages 7.71%, passes this evaluation.

THOR INDUSTRIES, INC.

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

Thor Industries, Inc. manufactures a range of recreational vehicles (RVs) in the United States and sells those vehicles primarily in the United States and Canada. The Company's segments include towable recreational vehicles, which consists of the operations of Airstream, Inc. (Airstream) (towable); Heartland Recreational Vehicles, LLC (Heartland) (including Bison Coach, LLC (Bison), Cruiser RV, LLC (CRV) and DRV, LLC (DRV)); Jayco, Corp. (Jayco) (including Jayco towable, Starcraft and Highland Ridge), Keystone RV Company (Keystone) (including CrossRoads and Dutchmen) and K.Z., Inc. (KZ) (including Livin' Lite RV, Inc. (Livin' Lite)); motorized recreational vehicles, which consists of the operations of Airstream (motorized), Jayco (including Jayco motorized and Entegra Coach) and Thor Motor Coach, Inc. (Thor Motor Coach), and Other, which includes the operations of its subsidiary, Postle Operating, LLC (Postle).


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (19.52) relative to the growth rate (27.41%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for THO (0.71) makes it favorable.


SALES AND P/E RATIO: PASS

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. THO, whose sales are $7,770.1 million, needs to have a P/E below 40 to pass this criterion. THO's P/E of (19.52) is considered acceptable.


INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for THO was 8.81% last year, while for this year it is 6.35%. Since inventory to sales has decreased from last year by -2.46%, THO passes this test.


EPS GROWTH RATE: PASS

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for THO is 27.4%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for THO (5.34%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for THO (2.84%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for THO (1.60%) 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.

PETMED EXPRESS INC

Strategy: Growth Investor
Based on: Martin Zweig

PetMed Express, Inc. (PetMed Express), doing business as 1800PetMeds, is a pet pharmacy. The Company markets prescription and non-prescription pet medications, and other health products for dogs and cats, direct to the consumer. It offers a selection of products for dogs and cats. Its product line contains approximately 3,000 stock keeping units (SKUS) of pet medications, health products and supplies. Its products include brands of medication, such as Frontline Plus, K9 Advantix II, Advantage II, Heartgard Plus, Sentinel, Revolution and Rimadyl. It also offers additional pet supplies for sale on its Website, which are drop shipped to its customers by third parties. These pet supplies include food, beds, crates, stairs, strollers and other pet supplies. Its products included Non-Prescription Medications (Over the Counter (OTC)) and supplies, and Prescription Medications (Rx). Its customers are located in California, Florida, Texas, New York, Virginia and Georgia, among others.


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. PETS's P/E is 34.77, based on trailing 12 month earnings, while the current market PE is 27.00. 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. PETS's revenue growth is 1.78%, while it's earnings growth rate is 8.31%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, PETS 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 (9.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (9.9%) of the current year. Sales growth for the prior must be greater than the latter. For PETS 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. PETS's EPS ($0.43) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. PETS's EPS for this quarter last year ($0.24) pass this test.


POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS

The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. PETS's growth rate of 79.17% 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 PETS is 4.16%. This should be less than the growth rates for the 3 previous quarters which are 0.00%, 37.04% and 40.63%. PETS 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, 27.71%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 79.17%, (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, 79.17% must be greater than or equal to the historical growth which is 8.31%. PETS 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. PETS, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.86, 0.90, 0.87, 1.01, and 1.17, fails this test.


LONG-TERM EPS GROWTH: FAIL

The final important criterion in this approach is that Earnings Growth be at least 15% per year. PETS's long-term growth rate of 8.31%, based on the average of the 3, 4 and 5 year historical eps growth rates, fails the minimum required.


TOTAL DEBT/EQUITY RATIO: PASS

A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. PETS's Debt/Equity (0.00%) is not considered high relative to its industry (3,805.51%) 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 PETS, this criterion has not been met (insider sell transactions are 95, while insiders buying number 45). 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.

SIGNET JEWELERS LTD.

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

Signet Jewelers Limited is a retailer of diamond jewelry. The Company's segments include the Sterling Jewelers division; the Zale division, which consists of the Zale Jewelry and Piercing Pagoda segments; the UK Jewelry division, and Other. The Sterling Jewelers division's stores operate in the United States principally as Kay Jewelers (Kay), Kay Jewelers Outlet, Jared The Galleria Of Jewelry (Jared) and Jared Vault. The Zale division operates jewelry stores (Zale Jewelry) and kiosks (Piercing Pagoda), located primarily in shopping malls across the United States, Canada and Puerto Rico. Zale Jewelry includes the United States store brand, Zales, and the Canadian store brand, Peoples Jewellers. Piercing Pagoda operates through mall-based kiosks. The UK Jewelry division operates stores in the United Kingdom, Republic of Ireland and Channel Islands. The Other segment includes the operations of subsidiaries involved in the purchasing and conversion of rough diamonds to polished stones.


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. SIG, with a market cap of $3,342 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. SIG, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 4.35, 4.56, 4.75, 5.87 and 6.93, 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. SIG's Price/Sales ratio of 0.54, based on trailing 12 month sales, passes this criterion.


RELATIVE STRENGTH: FAIL

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. SIG has a relative strength of 14. This does not pass the final criterion. As a result, this methodology would not consider the stock even though it passed the previous three criteria.


Watch List

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

Ticker Company Name Current
Score
MGA MAGNA INTERNATIONAL INC. (USA) 74%
FIZZ NATIONAL BEVERAGE CORP. 73%
ESNT ESSENT GROUP LTD 65%
AGX ARGAN, INC. 64%
NLS NAUTILUS, INC. 64%
MAN MANPOWERGROUP INC. 63%
HIBB HIBBETT SPORTS, INC. 62%
CBG CBRE GROUP INC 59%
SAFM SANDERSON FARMS, INC. 58%
MCK MCKESSON CORPORATION 57%



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