Guru Analysis
ROYAL DUTCH SHELL PLC (ADR) |
| Strategy: P/E/Growth Investor
Based on: Peter Lynch |
| The Royal Dutch Shell plc explores for crude oil and natural gas around the world, both in conventional fields and from sources, such as tight rock, shale and coal formations. The Company's segments include Integrated Gas, Upstream, Downstream and Corporate. The Integrated Gas segment is engaged in the liquefaction and transportation of gas and the conversion of natural gas to liquids to provide fuels and other products, as well as projects with an integrated activity, ranging from producing to commercializing gas. The Upstream segment includes the operations of Upstream, which is engaged in the exploration for and extraction of crude oil, natural gas and natural gas liquids, and the marketing and transportation of oil and gas, and Oil Sands, which is engaged in the extraction of bitumen from mined oil sands and conversion into synthetic crude oil. The Downstream segment is engaged in oil products and chemicals manufacturing, and marketing activities. |
DETERMINE THE CLASSIFICATION:
This methodology would consider RDS.A a "fast-grower".
P/E/GROWTH RATIO: PASS
The investor should examine the P/E (11.01) relative to the growth rate (38.28%), 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 RDS.A (0.29) 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. RDS.A, whose sales are $388,379.0 million, needs to have a P/E below 40 to pass this criterion. RDS.A's P/E of (11.01) 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 RDS.A was 8.26% last year, while for this year it is 5.44%. Since inventory to sales has decreased from last year by -2.83%, RDS.A 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 RDS.A is 38.3%, 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: PASS
This methodology would consider the Debt/Equity ratio for RDS.A (38.67%) to be normal (equity is approximately twice debt).
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 RDS.A (5.60%) 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 RDS.A (-15.65%) 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. |
| Strategy: Contrarian Investor
Based on: David Dreman |
| Bruker Corporation designs and manufactures scientific instruments, and analytical and diagnostic solutions. Its segments include the Bruker BioSpin Group; the Bruker Chemicals, Applied Markets, Life Science, In-Vitro Diagnostics, Detection (CALID) Group; the Bruker Nano Group, and the Bruker Energy & Supercon Technologies (BEST) Segment. The Bruker BioSpin Group segment designs, manufactures and distributes enabling life science tools. The Bruker CALID segment designs, manufactures and distributes life science mass spectrometry instruments that can be integrated and used along with other sample preparation or chromatography instruments, as well as chemical, biological, radiological, nuclear and explosive detection products. The Bruker Nano segment designs, manufactures and distributes spectroscopy and microscopy instruments. The BEST segment develops and manufactures superconducting and non-superconducting materials and devices. It also focuses on nanomechanical testing instruments. |
MARKET CAP: PASS
Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. BRKR has a market cap of $5,906 million, therefore passing the test.
EARNINGS TREND: PASS
A company should show a rising trend in the reported earnings for the most recent quarters. BRKR's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.28, 0.50 have been increasing, and therefore the company passes this test.
EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: PASS
This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. BRKR passes this test as its EPS growth rate over the past 6 months (150.00%) has beaten that of the S&P (-4.09%). BRKR's estimated EPS growth for the current year is (37.72%), which indicates the company is expected to experience positive earnings growth. As a result, BRKR passes this test.
This methodology would utilize four separate criteria to determine if BRKR is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest".
P/E RATIO: FAIL
The P/E of a company should be in the bottom 20% of the overall market. BRKR's P/E of 32.96, based on trailing 12 month earnings, is higher than the bottom 20% criterion (below 10.57), and therefore fails this test.
PRICE/CASH FLOW (P/CF) RATIO: FAIL
The P/CF of a company should be in the bottom 20% of the overall market. BRKR's P/CF of 24.02 does not meet the bottom 20% criterion (below 5.96), and therefore fails this test.
PRICE/BOOK (P/B) VALUE: FAIL
The P/B value of a company should be in the bottom 20% of the overall market. BRKR's P/B is currently 6.58, which does not meet the bottom 20% criterion (below 0.97), and it therefore fails this test.
PRICE/DIVIDEND (P/D) RATIO: FAIL
The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). BRKR's P/D of 238.10 does not meet the bottom 20% criterion (below 18.80), and it therefore fails this test.
This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below.
CURRENT RATIO: PASS
A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [2.19] or greater than 2). This is one identifier of financially strong companies, according to this methodology. BRKR's current ratio of 2.18 passes the test.
PAYOUT RATIO: PASS
A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for BRKR is 14.02%, while its historical payout ratio has been 20.97%. Therefore, it passes the payout criterion.
RETURN ON EQUITY: PASS
The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 18.02%, and would consider anything over 27% to be staggering. The ROE for BRKR of 22.16% is high enough to pass this criterion.
PRE-TAX PROFIT MARGINS: PASS
This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. BRKR's pre-tax profit margin is 12.91%, thus passing this criterion.
YIELD: FAIL
The company in question should have a yield that is high and that can be maintained or increased. BRKR's current yield is 0.42%, while the market yield is 2.65%. BRKR fails this test.
LOOK AT THE TOTAL DEBT/EQUITY: PASS
The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 69.89%. BRKR's Total Debt/Equity of 38.04% is considered acceptable. |
INSIGHT ENTERPRISES, INC. |
| Strategy: P/E/Growth Investor
Based on: Peter Lynch |
| Insight Enterprises, Inc. is a global information technology company. The Company provides its services to business of all sizes from small and medium-sized firms to enterprises, governments, schools and healthcare organizations. It defines, architects, implements and manages Intelligent Technology Solutions in North America, Europe, the Middle East and Africa and Asia-Pacific. The Company's new go-to-market messaging helps organizations manage their technology today and transform for tomorrow. Its offerings include services solutions offerings, hardware offerings and software offerings. Services solutions offerings include supply chain optimization, connected workforce solution, Cloud and data center transformation and digital Innovation. Its hardware offerings offers products from hundreds of manufacturers, including Cisco, HP Inc., Lenovo, Dell, HP, EMC, Apple and IBM. Its software offerings offer products from hundreds of publishers, including Microsoft, Adobe and VMware. |
DETERMINE THE CLASSIFICATION:
This methodology would consider NSIT a "fast-grower".
P/E/GROWTH RATIO: PASS
The investor should examine the P/E (12.52) relative to the growth rate (25.42%), 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 NSIT (0.49) 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. NSIT, whose sales are $7,080.1 million, needs to have a P/E below 40 to pass this criterion. NSIT's P/E of (12.52) 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 NSIT was 3.45% last year, while for this year it is 2.10%. Since inventory to sales has decreased from last year by -1.36%, NSIT 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 NSIT is 25.4%, 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 NSIT (19.95%) 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 NSIT (13.91%) 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 NSIT (-2.67%) 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. |
| Strategy: Growth/Value Investor
Based on: James P. O'Shaughnessy |
| Insperity, Inc. provides a range of human resources (HR) and business solutions. The Company's HR services offerings are provided through its Workforce Optimization and Workforce Synchronization solutions (together, its professional employer organization (PEO) HR Outsourcing solutions), which encompass a range of human resources functions, including payroll and employment administration, employee benefits, workers' compensation, performance management and training and development services, along with its cloud-based human capital management platform, the Employee Service Center (ESC). In addition to its PEO HR Outsourcing solutions, it offers various other business performance solutions, including Human Capital Management, Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Retirement Services and Insurance Services, which are offered through desktop applications and cloud-based delivery models. |
MARKET CAP: PASS
The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. NSP, with a market cap of $5,017 million, passes this criterion.
EARNINGS PER SHARE PERSISTENCE: PASS
The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. NSP, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.53, 0.79, 1.54, 2.08 and 3.24, passes this test.
PRICE/SALES RATIO: PASS
The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. NSP's Price/Sales ratio of 1.31, based on trailing 12 month sales, passes this criterion.
RELATIVE STRENGTH: PASS
The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. NSP, whose relative strength is 95, is in the top 50 and would pass this last criterion. |
DISCOVER FINANCIAL SERVICES |
| Strategy: Growth Investor
Based on: Martin Zweig |
| Discover Financial Services (DFS) is a direct banking and payment services company. The Company is a bank holding company, as well as a financial holding company. The Company operates through two segments: Direct Banking and Payment Services. It provides direct banking products and services, and payment services through its subsidiaries. It offers its customers credit card loans, private student loans, personal loans, home equity loans and deposit products. The Company's Direct Banking segment includes consumer banking and lending products, specifically Discover-branded credit cards issued to individuals and small businesses on the Discover Network and other consumer banking products and services. The Company's direct banking offers credit cards, student loans, personal loans, home equity loans, and other consumer lending and deposit products. The Payment Services segment includes PULSE, Diners Club and the Company's Network Partners business. |
P/E RATIO: PASS
The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. DFS's P/E is 8.97, based on trailing 12 month earnings, while the current market PE is 77.00. Therefore, it passes the first test.
REVENUE GROWTH IN RELATION TO EPS GROWTH: FAIL
Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. DFS's revenue growth is 9.82%, while it's earnings growth rate is 12.17%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, DFS fails this criterion.
SALES GROWTH RATE: PASS
Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (13.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (12.3%) of the current year. Sales growth for the prior must be greater than the latter. For DFS this criterion has been met.
The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria.
CURRENT QUARTER EARNINGS: PASS
The first of these criteria is that the current EPS be positive. DFS's EPS ($2.03) pass this test.
QUARTERLY EARNINGS ONE YEAR AGO: PASS
The EPS for the quarter one year ago must be positive. DFS's EPS for this quarter last year ($1.53) pass this test.
POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS
The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. DFS's growth rate of 32.68% passes this test.
EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: PASS
Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for DFS is 6.09%. This should be less than the growth rates for the 3 previous quarters, which are 27.27%, 35.71%, and 28.30%. DFS passes this test, which means that it has good, reasonably steady earnings.
This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below.
EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: PASS
If the growth rate of the prior three quarter's earnings, 30.32%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 32.68%, (versus the same quarter one year ago) then the stock passes.
EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: PASS
The EPS growth rate for the current quarter, 32.68% must be greater than or equal to the historical growth which is 12.17%. DFS would therefore pass this test.
EARNINGS PERSISTENCE: PASS
Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. DFS, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 4.90, 5.13, 5.76, 5.94 and 7.79, passes this test.
LONG-TERM EPS GROWTH: FAIL
The final important criterion in this approach is that Earnings Growth be at least 15% per year. DFS's long-term growth rate of 12.17%, based on the average of the 3, 4 and 5 year historical eps growth rates, fails the minimum required.
INSIDER TRANSACTIONS: PASS
A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For DFS, this criterion has not been met (insider sell transactions are 15, while insiders buying number 26). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion. |
LPL FINANCIAL HOLDINGS INC |
| Strategy: P/E/Growth Investor
Based on: Peter Lynch |
| LPL Financial Holdings Inc. is a broker-dealer, a custodian for registered investment advisors and an independent consultant to retirement plans. The Company provides a platform of brokerage and investment advisory services to independent financial advisors, including financial advisors at financial institutions across the country. It also supported approximately 4,000 financial advisors, affiliated and licensed with insurance companies through customized clearing services, advisory platforms and technology solutions, as of December 31, 2016. Through its advisors, it is a distributor of financial products and services in the United States. It provides its technology and service to advisors through a technology platform that is server-based and Web-accessible. Its technology offerings are designed to permit its advisors to manage various aspects of their businesses. It automates time-consuming processes, such as account opening and management, document imaging and account rebalancing. |
DETERMINE THE CLASSIFICATION:
This methodology would consider LPLA a "fast-grower".
P/E/GROWTH RATIO: PASS
The investor should examine the P/E (15.08) relative to the growth rate (30.77%), 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 LPLA (0.49) 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. LPLA, whose sales are $5,188.4 million, needs to have a P/E below 40 to pass this criterion. LPLA's P/E of (15.08) 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 LPLA is 30.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.
TOTAL DEBT/EQUITY RATIO: NEUTRAL
LPLA is a financial company so debt to equity rules are not applied to determine the company's financial soundness.
EQUITY/ASSETS RATIO: PASS
This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. LPLA's Equity/Assets ratio (18.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion.
RETURN ON ASSETS: PASS
This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. LPLA's ROA (8.11%) is above the minimum 1% that this methodology looks for, thus passing the criterion.
FREE CASH FLOW: NEUTRAL
The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for LPLA (5.01%) 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 LPLA (-15.21%) 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. |
| Strategy: Patient Investor
Based on: Warren Buffett |
| MasterCard Incorporated is a technology company that connects consumers, financial institutions, merchants, governments and businesses across the world, enabling them to use electronic forms of payment. The Company operates through Payment Solutions segment. The Company allows user to make payments by creating a range of payment solutions and services using its brands, which include MasterCard, Maestro and Cirrus. The Company provides a range of products and solutions that support payment products, which customers can offer to their cardholders. The Company's services facilitate transactions on its network among cardholders, merchants, financial institutions and governments. The Company's products include consumer credit and charge, commercial, debit, prepaid, commercial and digital. The Company's consumer credit and charge offers a range of programs that enables issuers to provide consumers with cards allowing users to defer payment. |
STAGE 1: "Is this a Buffett type company?"
A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage.
LOOK FOR EARNINGS PREDICTABILITY: PASS
Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 1.12, 1.41, 1.48, 2.19, 2.56, 3.09, 3.35, 3.69, 4.38, 5.52. Buffett would consider MA's earnings predictable. In fact EPS have increased every year. MA's long term historical EPS growth rate is 16.7%, based on the average of the 3, 4 and 5 year historical eps growth rates.
LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: PASS
Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for MA, over the last ten years, is 54.4%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 35.0%, 33.2%, 30.8%, 37.5%, 39.4%, 50.8%, 60.8%, 69.2%, 83.3%, 104.3%, and the average ROE over the last 3 years is 85.6%, thus passing this criterion.
LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON ASSETS: PASS
Buffett also requires, for financial companies, that the average Return On Assets (ROA) be at least 1% and consistent. Return On Assets is defined as the net earnings of the business divided by the total assets of the business. The average ROA for MA, over the last ten years, is 20.4%, which is high enough to pass. It is not enough that the average be at least 1%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROA must be at least 1% for Buffett to feel comfortable that the ROA is consistent. The ROA for the last 10 years, from earliest to latest, is 16.4%, 19.5%, 16.9%, 20.8%, 20.7%, 22.5%, 22.6%, 21.0%, 21.3%, 22.6%, thus passing this criterion.
LOOK AT CAPITAL EXPENDITURES: PASS
Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. MA's free cash flow per share of $4.46 is positive, indicating that the company is generating more cash that it is consuming. This is a favorable sign, and so the company passes this criterion.
LOOK AT MANAGEMENT'S USE OF RETAINED EARNINGS: PASS
Buffett likes to see if management has spent retained earnings in a way that benefits shareholders. To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $24.43 and compares it to the gain in EPS over the same period of $4.40. MA's management has proven it can earn shareholders a 18.0% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work.
HAS THE COMPANY BEEN BUYING BACK SHARES: BONUS PASS
Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. MA's shares outstanding have fallen over the past five years from 1,115,369,995 to 1,038,000,000, thus passing this criterion. This is a bonus criterion and will not adversely affect the ability of a stock to pass the strategy as a whole if it is failed.
The preceding concludes Buffett's qualitative analysis. If and when he gets positive responses to all the above criteria, he would then proceed with a price analysis. The price analysis will determine whether or not the stock should be bought. The following is how he would evaluate MA quantitatively.
STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return.
CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail]
Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $5.52 and divide it by the current market price of $222.41. An investor, purchasing MA, could expect to receive a 2.48% initial rate of return. Furthermore, he or she could expect the rate to increase 16.7% per year, based on the average of the 3, 4 and 5 year historical eps growth rates, as this is how fast earnings are growing.
COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: PASS
Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 3.25%. Compare this with MA's initial yield of 2.48%, which will expand at an annual rate of 16.7%, based on the average of the 3, 4 and 5 year historical eps growth rates. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding.
CALCULATE THE FUTURE EPS: [No Pass/Fail]
MA currently has a book value of $5.23. It is safe to say that if MA can preserve its average rate of return on equity of 54.4% and continues to retain 85.01% of its earnings, it will be able to sustain an earnings growth rate of 46.3% and it will have a book value of $234.66 in ten years. If it can still earn 54.4% on equity in ten years, then expected EPS will be $127.74.
CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]
Now take the expected future EPS of $127.74 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (40.3) (5 year average P/E in this case), which is 31.3 and you get MA's projected future stock price of $3,996.98.
CALCULATE THE EXPECTED RATE OF RETURN BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]
Now add in the total expected dividend pool to be paid over the next ten years, which is $21.33. This gives you a total dollar amount of $4,018.30. These numbers indicate that one could expect to make a 33.6% average annual return on MA's stock at the present time. Buffett would consider this an absolutely fantastic expected return.
CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail]
If you take the EPS growth of 16.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, you can project EPS in ten years to be $25.89. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (40.3) (5 year average P/E in this case), which is 31.3. This equals the future stock price of $810.12. Add in the total expected dividend pool of $21.33 to get a total dollar amount of $831.44.
CALCULATE THE EXPECTED RETURN USING THE AVERAGE EPS GROWTH METHOD: [No Pass/Fail]
Now you can figure out your expected return based on a current price of $222.41 and the future expected stock price, including the dividend pool, of $831.44. If you were to invest in MA at this time, you could expect a 14.10% average annual return on your money. Buffett likes to see a 15% return, but nonetheless would accept this return.
LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: PASS
Based on the two different methods, you could expect an annual compounding rate of return somewhere between 14.1% and 33.6%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 23.8% on MA stock for the next ten years, based on the current fundamentals. Buffett would consider this an exceptional return, thus passing the criterion. |
| Strategy: P/E/Growth Investor
Based on: Peter Lynch |
| Essent Group Ltd. is a private mortgage insurance company. The Company is engaged in offering private mortgage insurance and reinsurance for mortgages secured by residential properties located in the United States. Its products and services include mortgage insurance, contract underwriting, and Bermuda-based insurance and reinsurance. The Company's primary mortgage insurance is offered to customers on individual loans at the time of origination on a flow basis, but can also be written in bulk transactions. Its pool insurance provides additional credit enhancement for certain secondary market and other mortgage transactions. The primary mortgage insurance operations were conducted through Essent Guaranty, Inc. which is a mortgage insurer licensed to write mortgage insurance in all 50 states and the District of Columbia, as of December 31, 2016. It offers primary mortgage insurance, pool insurance and master policy. It provides contract underwriting services through CUW Solutions, LLC. |
DETERMINE THE CLASSIFICATION:
This methodology would consider ESNT a "fast-grower".
P/E/GROWTH RATIO: PASS
The investor should examine the P/E (8.92) relative to the growth rate (43.45%), 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 ESNT (0.21) 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. ESNT, whose sales are $719.4 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate.
EPS GROWTH RATE: PASS
This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for ESNT is 43.5%, 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: NEUTRAL
ESNT is a financial company so debt to equity rules are not applied to determine the company's financial soundness.
EQUITY/ASSETS RATIO: PASS
This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. ESNT's Equity/Assets ratio (75.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion.
RETURN ON ASSETS: PASS
This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. ESNT's ROA (16.05%) is above the minimum 1% that this methodology looks for, thus passing the criterion.
FREE CASH FLOW: NEUTRAL
The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for ESNT (14.90%) 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 ESNT (-3.81%) 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. |
| Strategy: Small-Cap Growth Investor
Based on: Motley Fool |
| Monster Beverage Corporation develops, markets, sells and distributes energy drink beverages, sodas and/or concentrates for energy drink beverages, primarily under various brand names, including Monster Energy, Monster Rehab, Monster Energy Extra Strength Nitrous Technology, Java Monster, Muscle Monster, Mega Monster Energy, Punch Monster, Juice Monster, Ubermonster, BU, Mutant Super Soda, Nalu, NOS, Burn, Mother, Ultra, Play and Power Play, Gladiator, Relentless, Samurai, BPM and Full Throttle. The Company has three segments: Monster Energy Drinks segment, which consists of its Monster Energy drinks, as well as Mutant Super Soda drinks; Strategic Brands segment, which includes various energy drink brands owned through The Coca-Cola Company (TCCC), and Other segment (Other), which includes the American Fruits & Flavors (AFF) third-party products. The Strategic Brands segment sells concentrates and/or beverage bases to authorized bottling and canning operations. |
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. MNST's profit margin of 26.13% 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. MNST, with a relative strength of 75, 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 MNST (2.38% for EPS, and 14.05% for Sales) are not good enough to pass.
INSIDER HOLDINGS: PASS
MNST's insiders should own at least 10% (they own 27.72% ) 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. MNST's free cash flow of $1.95 per share passes this test.
PROFIT MARGIN CONSISTENCY: PASS
MNST's profit margin has been consistent or even increasing over the past three years (Current year: 26.08%, Last year: 24.36%, Two years ago: 23.37%), 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 MNST's case.
CASH AND CASH EQUIVALENTS: PASS
MNST's level of cash $958.2 million passes this criteria. If a company is a cash generator, like MNST, 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 MNST was 7.59% last year, while for this year it is 7.29%. Since the inventory to sales is decreasing by -0.30% the stock passes this criterion.
ACCOUNT RECEIVABLE TO SALES: PASS
This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for MNST was 13.34% last year, while for this year it is 12.73%. Since the AR to sales is decreasing by -0.61% the stock passes this criterion.
LONG TERM DEBT/EQUITY RATIO: PASS
MNST'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. MNST's PEG Ratio of 1.68 is very high.
The following criteria for MNST are less important which means you would place less emphasis on them when making your investment decision using this strategy:
AVERAGE SHARES OUTSTANDING: PASS
MNST has not been significantly increasing the number of shares outstanding within recent years which is a good sign. MNST currently has 557.0 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. MNST's sales of $3,807.2 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
MNST does not pass the Daily Dollar Volume (DDV of $206.6 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. MNST with a price of $61.59 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
MNST's income tax paid expressed as a percentage of pretax income this year was (23.08%) and last year (28.22%) 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. |
| Strategy: Growth/Value Investor
Based on: James P. O'Shaughnessy |
| CBRE Group, Inc. is a holding company that conducts all of its operations through its subsidiaries. The Company operates as a commercial real estate services and investment company. The Company operates through the segments: The Americas; Europe, Middle East and Africa (EMEA); Asia Pacific; Global Investment Management, and Development Services. The Company provides commercial real estate services under the CBRE brand name, investment management services under the CBRE Global Investors brand name and development services under the Trammell Crow Company brand name. The Company's business is focused on commercial property, corporate facilities, project and transaction management, tenant/occupier and property/agency leasing, capital markets solutions (property sales, commercial mortgage brokerage, loan origination and servicing) real estate investment management, valuation, development services and proprietary research. |
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. CBRE, with a market cap of $16,745 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. CBRE, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.45, 1.63, 1.69, 2.47 and 3.14, passes this test.
PRICE/SALES RATIO: PASS
The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. CBRE's Price/Sales ratio of 0.78, 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. CBRE, whose relative strength is 70, is in the top 50 and would pass this last criterion. |
Watch List
The top scoring stocks not currently in the Hot List portfolio.
| Ticker |
Company Name |
Industry |
Current
Score |
| TX |
TERNIUM SA (ADR) |
Iron & Steel |
66% |
| CFG |
CITIZENS FINANCIAL GROUP INC |
Regional Banks |
63% |
| ERIE |
ERIE INDEMNITY COMPANY |
Insurance (Prop. & Casualty) |
60% |
| FTNT |
FORTINET INC |
Software & Programming |
60% |
| TECK |
TECK RESOURCES LTD (USA) |
Coal |
59% |
| BK |
BANK OF NEW YORK MELLON CORP |
Regional Banks |
55% |
| HEI |
HEICO CORP |
Aerospace & Defense |
55% |
| PCTY |
PAYLOCITY HOLDING CORP |
Software & Programming |
55% |
| GTN |
GRAY TELEVISION, INC. |
Broadcasting & Cable TV |
53% |
| CDW |
CDW CORP |
Software & Programming |
53% |
|
