The Economy

Despite a weak April jobs report, the economic news has been fairly positive over the past couple weeks, with continued strong growth in the service sector and in personal income offsetting the employment data.

The private sector added 156,000 jobs in April, according to payroll processor ADP, the lowest monthly total in about three years, and about 40,000 less than analysts were expecting. There remained two very different stories in terms of manufacturing jobs and service sector jobs: The service sector added 166,000 jobs, while the manufacturing sector lost 13,000. While disappointing, 156,000 new jobs is nothing to sneeze at, and the disappointment is more a statement about how strong job growth has been over the past few years than it is about a poor April. The Labor Department is scheduled to release its April jobs report today, and we'll see if its data backs up ADP's findings.

While the manufacturing sector has been losing some jobs, the sector as a whole expanded for the second straight month -- though just barely -- according to the Institute for Supply Management. Strong levels of new orders and production and a significant jump in raw material prices drove the expansion. The manufacturing index reading was well above the level that indicates growth of the overall economy, the 83rd straight month it has been above that mark. The reading corresponded to a 2.2% increase in real annualized gross domestic product.

Service sector growth remains quite strong, according to ISM, as the sector expanded in April for the 75th straight month, doing so at the fastest pace since December. New orders were extremely high, and employment conditions picked up in the sector during the month, ISM's data showed.

Personal income rose 0.4% in March, meanwhile, according to the Commerce Department, a very solid increase. Real disposable personal income rose 0.3%, while real personal consumption expenditures were flat . Amid all of this, the personal savings rate rose 0.3 percentage points to a very strong 5.4%.

Oil prices have remained in the mid-$40 price range, while gas prices keep rebounding. As of May 4, a gallon of regular unleaded on average cost $2.22, up from $2.06 a month earlier. That's still 15% below where it was one year ago.

Overseas, China's manufacturing sector remains sluggish. The Caixin magazine's purchasing managers' index for the sector declined to 49.4 from March's reading of 49.7, remaining just below the level (50) that separates expansion and contraction in the sector, CBC News reported.

Since our last newsletter, the S&P 500 returned -2.0%, while the Hot List returned -6.0%. So far in 2016, the portfolio has returned -1.5% vs. 0.3% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 177.5% vs. the S&P's 105.0% gain.

Searching for Value

Since falling to two-year lows in February, stocks have rebounded nicely, with the S&P 500 pushing back above the 2,000 mark. A number of factors have triggered the reversal, including positive US economic data, a rebound in oil prices, and mild improvements in China's economy.

How has that affected valuations? Let's take a look.

First, we'll start with earnings. Using the S&P 500's May 4 late afternoon price of 2,050, the index is trading for about 23.4 times trailing 12-month (TTM) as-reported earnings per share, up from about 20 in February, when last we checked in.

Using projected operating earnings for the next year, the P/E is about 16.9, up from 15.2 in February. The operating P/E is thus in a reasonable range; the as-reported P/E is pretty high. Overall, these earnings-based valuation metrics indicate that the market is overvalued, but not at "exuberant" levels.

The S&P's price/sales ratio, meanwhile, is 1.76, up from 1.66 when we last checked in, according to Morningstar.com. Its price/book ratio is 2.52, up from 2.4 in February. From 1978 through early 2011, the average S&P price/book ratio was about 2.4, according to data from Ned Davis Research and Comstock Partners. The current price/sales ratio is higher than the historical average cited by Comstock and Ned Davis. But again, it doesn't seem exuberant -- my James O'Shaughnessy-based growth model considers P/S ratios of up to 1.5 to be indicative of good values.

Dividend yields, meanwhile, remain attractive. At 2.2%, the S&P yield is down a couple notches from February, when it was 2.4%, but still solid. select also risen significantly

After falling sharply in late 2015 and early 2016, the Stock Market/GDP ratio has been rising again. The metric, which compares the market cap of the Wilshire Total Market Index to gross domestic product, is now 116.9%, up from 104.6% in February but still below its July 2015 level of 123.4%, according to GuruFocus.com. That puts it in the "Significantly Overvalued" range, based on the site's analysis of historical data.

The 10-year cyclically adjusted price/earnings ratio has also risen. The ratio, which uses inflation-adjusted average earnings for the past decade to smooth out short-term fluctuations, is at about 25.7, using Yale Economist Robert Shiller's earnings data. That's up from 23.2 back in February, and well above the 16.6 historical average (which dates back to 1871). As I've noted before, it may be more appropriate to look at the figure in the context of its post-World War II average, which is 18.6 (after World War II, inflation became a permanent part of the U.S. economy; since inflation eats away so significantly at fixed-income assets, investors should be willing to pay higher multiples for stocks when inflation is a factor). Still, the figure is quite elevated, as it has been throughout almost the entire bull market.

(Note: In the past, I've talked about how using different time periods for the CAPE can have a big impact on the metric. Larry Swedroe wrote an excellent recent column examining the CAPE using 5-year and 6-year earnings, noting that those periods are closer to the length of average economic cycles. You can find the piece here -- I highly recommend checking it out. Swedroe finds that the shorter duration CAPEs still indicate the market is overvalued, though by a significantly smaller margin than the 10-year does.)

The Q ratio also indicates that the market is overvalued. Based on a methodology developed by Nobel Laureate James Tobin, the "Q" Ratio is determined by dividing the total price of the stock market by the replacement cost of all of its companies. The Federal Reserve provides data needed to make the calculation in its Flow of Funds Accounts report, though that only is released once per quarter. Using the most recent report, which came at the end of the fourth-quarter, Doug Short of Advisor Perspectives (who writes a monthly update on the ratio) puts the Q at 0.95, up just slightly from 0.94 in February. That was 40% higher than the historical average using the arithmetic mean and 50% higher than the geometric mean. As has been the case for some time, the current Q indicates the market is overvalued, but it has fallen significantly over the past 2 years or so.

Digging Through The Pockets

Given all of the data above, it's hard to argue that the market is not overvalued, though exactly how overvalued is up for debate. Based on the totality of the data, I don't think we've reached "exuberant" levels, though I do think the broader market's overvaluation is not insignificant.

That's not cause for alarm, however. Markets get overvalued during bull runs -- the market cannot, by definition, always be trading at a below-average valuation. And usually, markets keep going up for quite a while after they get into overvalued territory.

In addition, while stock-pickers should be cognizant of the broader market's valuation, they shouldn't use it to time their participation in equities. That's because, even when the market as a whole is expensive, you can often still find pockets of value.

Consider a few numbers. Since the end of 2005, we've been tracking the valuation characteristics of the several thousand stocks in our database. Since then, they have traded at an average trailing 12-month P/E ratio of 19.1. Currently, the average is 21.3, representing an 11.6% premium over the long-term average. The average price/sales ratio over that 10-plus year stretch has been 1.74, meanwhile. Currently, it is 1.97. That's a 13.2% premium.

But a closer look shows a big gap between the valuations of larger stocks and smaller stocks. Large-cap stocks are trading at a 20.3% premium to their long-term average using the P/E ratio, and a 22.7% premium using the PSR. Looked at another way, since the end of 2005, large-caps have been more expensive only 6% of the time using the P/E and just 0.8% of the time using the PSR.

Small- and mid-cap stocks, meanwhile, are on average trading at P/Es 8.4% above their long-term average and PSRs 7.1% above the average. Since the end of '05, they've been more expensive about 30% of the time based on P/Es and about 40% of the time using the PSR. Expensive? A bit. Wildly overvalued? No.

Put these figures together and you see that small-caps have been this cheap relative to large caps only 4.4% of the time over the past decade-plus based on P/Es, and just 11% of the time based on PSRs. The graphic below shows that smaller stocks have been becoming more and more attractive compared to large-caps since 2011. A reading of 1.0 would indicate smaller stocks and larger stocks were trading at equal P/Es. (Keep in mind that small stocks typically trade at significantly higher valuations than larger stocks because they are considered better candidates for significant growth.)

Relative Valuation of Small Stocks vs. Large Stocks in Validea's All Stocks Universe

Screen Shot 2016-05-05 at 5.25.26 PM

Not surprisingly, the Hot List is keying on smaller firms right now. The portfolio is making a major overhaul on today's regularly scheduled rebalancing, dropping 7 of its holdings and replacing them with 7 new stocks whose scores on my models have surpassed them. On average, these 7 new stocks have a $2.3 billion market capitalization; None has a market cap greater than $5 billion, meeting all of them are in the small- and smaller-mid-cap spaces.

These stocks are cheap, trading for an average of about 15.6 times earnings -- and they're good, too. On average, they have grown earnings per share at a 34% pace and revenues and a 19% pace over the long term. The six non-financial firms have an average debt/equity ratio of just 1.6%. And they even offer a 1.4% average dividend yield.

Bitten By "FANGs"

Stocks with these kinds of fundamentals shouldn't be this cheap -- especially small stocks, which tend to trade at higher valuations than larger stocks to begin with. What gives?

I believe this has a lot to do with the swift rise of index funds. As I've noted before, smaller stocks are usually left out of the most popular index funds, which usually give a disproportionate amount of weight to the largest stocks. As more and more investors have turned to index funds in recent years, it has created a self-sustaining cycle in which the money that goes into index funds goes primarily to larger stocks. Most of these funds' holdings are weighted by market capitalization; actually, many of them give even more weight to the largest companies than would be merited based on market capitalization. When money goes into these funds, the big guys go up in price more than the smaller members of the index, causing them to gain even more weight in the index, which means new inflows will be even more disproportionally allocated to them.

This has led to mega-caps like the "FANG" stocks -- Facebook, Amazon, Netflix, Google -- having incredible runs that have made them extremely pricey. Yes, these companies are producing strong growth. But with long-term revenue growth of about 30% and long-term earnings growth of about 40%, the FANGs aren't growing all that much more quickly than the stocks we have added to the Hot List today. They are, however, carrying about 25 times as much debt (average debt/equity ratio of 40%) and selling at exorbitant valuations (average P/E of about 102; average price/sales ratio of almost 8). Would I be willing to pay a bit of a premium for these companies' economies of scale and competitive advantages? Sure. Would I be willing to pay 6 times as much for their earnings and 3 times as much for their sales as the Hot List newcomers, as you have to today? No. (I should note, however, that Facebook's fundamentals have been improving, and it is the one stock of the FANGs that I'm high on. As a group, however, they are far too pricey.)

Value matters. Even the most speculative investors should have learned that from the late 1990s/early 2000's tech bubble. And I believe there is still some value left in this market, even after 200%-plus gains over the past 7 years. But we are at the stage of the bull in which you need to be careful. That's what we are doing by making sure that we are not overpaying for growth. Eventually, we think this approach will be rewarded, as investors will realize that many of the large growth stocks are not worth the sky-high price tags, and they will recognize the value in far cheaper, smaller stocks that are producing nearly as much growth.


The Fallen

As we rebalance the Validea Hot List, 7 stocks leave our portfolio. These include: Hp Inc (HPQ), Waddell & Reed Financial, Inc. (WDR), Walker & Dunlop, Inc. (WD), Fossil Group Inc (FOSL), Western Digital Corp (WDC), Cal-maine Foods Inc (CALM) and Valero Energy Corporation (VLO).

The Keepers

3 stocks remain in the portfolio. They are: Thor Industries, Inc. (THO), Foot Locker, Inc. (FL) and Banco Macro Sa (Adr) (BMA).

The New Additions

We are adding 7 stocks to the portfolio. These include: Anika Therapeutics Inc (ANIK), Universal Forest Products, Inc. (UFPI), Comfort Systems Usa, Inc. (FIX), United Therapeutics Corporation (UTHR), Home Bancshares Inc (HOMB), Brocade Communications Systems, Inc. (BRCD) and Gannett Co Inc (GCI).

Latest Changes

Additions  
ANIKA THERAPEUTICS INC ANIK
UNIVERSAL FOREST PRODUCTS, INC. UFPI
COMFORT SYSTEMS USA, INC. FIX
UNITED THERAPEUTICS CORPORATION UTHR
HOME BANCSHARES INC HOMB
BROCADE COMMUNICATIONS SYSTEMS, INC. BRCD
GANNETT CO INC GCI
Deletions  
HP INC HPQ
WADDELL & REED FINANCIAL, INC. WDR
WALKER & DUNLOP, INC. WD
FOSSIL GROUP INC FOSL
WESTERN DIGITAL CORP WDC
CAL-MAINE FOODS INC CALM
VALERO ENERGY CORPORATION VLO


Newcomers to the Validea Hot List

Anika Therapeutics, Inc. (ANIK): Massachusetts-based Anika develops, manufactures and commercializes therapeutic products for tissue protection, healing and repair. The company's products are based on hyaluronic acid (HA), a naturally occurring, biocompatible polymer found throughout the body. The company's wholly owned subsidiary, Anika S.r.l., has about 20 products commercialized, primarily in Europe. Its therapeutic products help in the areas of orthobiologics, advanced wound care and aesthetic dermatology, surgery, ophthalmology, and veterinary services.

Anika ($625 million market cap) gets strong interest from my Peter Lynch-based model and high marks from my Motley Fool-inspired approach and my Momentum Investor model. To read more about its fundamentals, check out the "Detailed Stock Analysis" section below.

Brocade Communications Systems, Inc. (BRCD): Brocade is a supplier of networking equipment, including end-to-end IP-based Ethernet and storage area networking solutions for businesses and organizations of all types and sizes, including global enterprises, telecommunication firms, cable operators, and mobile carriers. Its products and services are sold globally, both directly to end-user customers and through distribution partners.

Brocade ($3.2 billion market cap) gets strong interest from my Peter Lynch-based model and high marks from my Benjamin Graham-based model. For details about its fundamentals, see the "Detailed Stock Analysis" section.

Comfort Systems USA, Inc. (FIX): Comfort Systems provides mechanical contracting services, including heating, ventilation and air conditioning, plumbing, piping and controls, as well as off-site construction, electrical, monitoring and fire protection. It installs, maintains and repairs products and systems throughout its approximately 35 operating units in 81 cities and 89 locations throughout the United States. CS offers services for industrial, healthcare, education, office, technology, retail and government facilities.

Comfort Systems ($1.1 billion market cap) gets strong interest from my Peter Lynch-based model and high marks from my Kenneth Fisher-based model. To read more about its fundamentals, check out the "Detailed Stock Analysis" section below.

Gannett Co., Inc., (GCI): This parent of such publications as USA Today and the Detroit Free Press has more than 120 markets internationally and reaches more than 100 million people per month. It has a $1.9 billion market cap and has taken in close to $3 billion in sales over the past year.

Gannett gets strong interest from my Joel Greenblatt-based model and high marks from my Kenneth Fisher-based model. For details about its fundamentals, see the "Detailed Stock Analysis" section.

Home BancShares (HOMB): Home provides a range of commercial and retail banking and related financial services to businesses, real estate developers and investors, individuals and municipalities through its wholly owned community bank subsidiary, Centennial Bank. Centennial has locations in Arkansas, Florida and South Alabama. Home ($3 billion market cap) has grown EPS at a 31% clip over the long term.

My Motley Fool-based strategy, which is inspired by an approach detailed by Fool co-creators Tom and David Gardner, is high on Home, as is my Peter Lynch-based model. To read more about its fundamentals, check out the "Detailed Stock Analysis" section below.

United Therapeutics (UTHR): This Maryland-based biotechnology company ($5 billion market cap) develops products used to treat chronic and life-threatening conditions such as pulmonary arterial hypertension, high-risk neuroblastoma, end-stage lung disease, Dengue, and influenza. It has been growing revenues at an 18% annual pace over the long haul.

My Peter Lynch- and Joel Greenblatt-based strategies are both keen on United. For details about its fundamentals, see the "Detailed Stock Analysis" section.

Universal Forest Products, Inc. (UFPI): Headquartered in Grand Rapids, Mich., with facilities throughout North America, Universal Forest Products ($1.6 billion market cap) delivers a wide variety of products to nationwide retailers that cater to both consumers and contractors. UFP is a holding company that provides capital, management and administrative resources to subsidiaries that design, manufacture and market wood and wood-alternative products for the retail, construction and industrial markets.

Universal has grown EPS at a 62% clip over the long term. My James O'Shaughnessy- and Kenneth Fisher-based strategies both give Universal high scores. To read more about its fundamentals, check out the "Detailed Stock Analysis" section below.



News about Validea Hot List Stocks

Western Digital Corp. (WDC): Western Digital on Thursday reported fiscal third-quarter earnings of $74 million, or 32 cents per share. Earnings, adjusted for one-time gains and costs, were $1.21 per share, which fell short of analysts' expectations of $1.25 per share, the Associated Press reported. Revenue was $2.82 billion in the period, falling short of forecasts for $2.86 billion.

Walker & Dunlop Inc. (WD): W&D on Wednesday reported first-quarter net income of $15.5 million, or 50 cents per share. The results missed analysts' estimates of 64 cents per share, according to the Associated Press.



The Next Issue

In two weeks, we will publish another issue of the Hot List, at which time we will take an in-depth look at my investment strategies. If you have any questions, please feel free to contact us at hotlist@validea.com.

Portfolio Holdings
Ticker Date Added Return
HOMB 5/6/2016 TBD
BMA 11/20/2015 -9.3%
GCI 5/6/2016 TBD
ANIK 5/6/2016 TBD
UFPI 5/6/2016 TBD
BRCD 5/6/2016 TBD
FL 4/8/2016 -2.4%
FIX 5/6/2016 TBD
THO 2/12/2016 27.6%
UTHR 5/6/2016 TBD


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

HOMB   |   BMA   |   GCI   |   ANIK   |   UFPI   |   BRCD   |   FL   |   FIX   |   THO   |   UTHR   |  

HOME BANCSHARES INC

Strategy: Growth Investor
Based on: Martin Zweig

Home BancShares, Inc. is a bank holding company. The Company is engaged in providing a range of commercial and retail banking, and related financial services to businesses, real estate developers and investors, individuals and municipalities through its community bank subsidiary, Centennial Bank (the Bank). The Company offers a range of products and services, including 24-hour Internet banking, mobile banking and voice response information, cash management, overdraft protection, direct deposit, safe deposit boxes, United States savings bonds and automatic account transfers. Cook Insurance Agency, Inc. is an independent insurance agency. Centennial Insurance Agency writes policies for commercial and personal lines of business, including insurance for property, casualty, life, health and employee benefits. The Centennial Bank trust department offers an array of trust services. These trust services is focused on personal trusts, corporate trusts and employee benefit trusts.


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. HOMB's P/E is 19.19, based on trailing 12 month earnings, while the current market PE is 15.00. Therefore, it passes the first test.


REVENUE GROWTH IN RELATION TO EPS GROWTH: FAIL

Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. HOMB's revenue growth is 23.39%, while it's earnings growth rate is 31.42%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, HOMB 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 (25.5%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (21%) of the current year. Sales growth for the prior must be greater than the latter. For HOMB 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. HOMB's EPS ($0.59) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. HOMB's EPS for this quarter last year ($0.46) 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. HOMB's growth rate of 28.26% 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 HOMB is 15.71%. This should be less than the growth rates for the 3 previous quarters, which are 16.28%, 26.83%, and 20.45%. HOMB 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, 21.09%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 28.26%, (versus the same quarter one year ago) then the stock passes.


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

The EPS growth rate for the current quarter, 28.26% must be greater than or equal to the historical growth which is 31.42%. Since this is not the case HOMB would therefore fail 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. HOMB, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.92, 1.11, 1.14, 1.70 and 2.02, passes this test.


LONG-TERM EPS GROWTH: PASS

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. HOMB's long-term growth rate of 31.42%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.


INSIDER TRANSACTIONS: PASS

A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For HOMB, this criterion has not been met (insider sell transactions are 102, while insiders buying number 109). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.

BANCO MACRO SA (ADR)

Strategy: Growth Investor
Based on: Martin Zweig

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


P/E RATIO: PASS

The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. BMA's P/E is 10.18, based on trailing 12 month earnings, while the current market PE is 15.00. Therefore, it passes the first test.


REVENUE GROWTH IN RELATION TO EPS GROWTH: PASS

Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. BMA's revenue growth is 42.07%, while it's earnings growth rate is 43.98%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, BMA passes this criterion.


SALES GROWTH RATE: FAIL

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (43.3%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (79%) of the current year. Sales growth for the prior must be greater than the latter. For BMA this criterion has not been met and fails this test.


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


CURRENT QUARTER EARNINGS: PASS

The first of these criteria is that the current EPS be positive. BMA's EPS ($2.37) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

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


POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS

The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. BMA's growth rate of 1,723.08% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: FAIL

Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for BMA is 21.99%. This should be less than the growth rates for the 3 previous quarters which are 25.00%, 18.18% and 228.57%. BMA 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, 76.92%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 1,723.08%, (versus the same quarter one year ago) then the stock passes.


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

The EPS growth rate for the current quarter, 1,723.08% must be greater than or equal to the historical growth which is 43.98%. BMA would therefore pass this test.


EARNINGS PERSISTENCE: PASS

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. BMA, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.14, 0.18, 0.28, 0.40 and 0.58, passes this test.


LONG-TERM EPS GROWTH: PASS

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. BMA's long-term growth rate of 43.98%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.

GANNETT CO INC

Strategy: Value Investor
Based on: Benjamin Graham

Gannett Co., Inc., formerly Gannett Spinco, Inc., is a media and marketing solutions company. The Company is engaged in providing local content on a range of platforms in the United States. The Company operates through Broadcasting and Digital segments. It also provides digital marketing services and Internet-based human resource solutions. Its digital media products and services include search, social media and Website development, among others. The Company offers its services in a range of geographies, demographics and content areas. The Company provides consumers with the information and entertainment, and connects consumers to their communities through various platforms, such as television stations, desktop, smartphone and tablet products. Its Broadcasting segment includes an independent station group of network affiliates. Its Digital business segment includes Cars.com, CareerBuilder, PointRoll and Shoplocal.


SECTOR: PASS

GCI 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 $340 million. GCI's sales of $2,827.0 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: FAIL

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. GCI's current ratio of 1.32 fails 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 GCI is $0.0 million, while the net current assets are $141.3 million. GCI passes this test.


LONG-TERM EPS GROWTH: PASS

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 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. GCI's EPS growth over that period of 426.0% passes the EPS growth test.


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. GCI's P/E of 13.08 (using the current PE) passes this test.


PRICE/BOOK RATIO: FAIL

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. GCI's Price/Book ratio is 1.73, while the P/E is 13.08. GCI fails the Price/Book test.

ANIKA THERAPEUTICS INC

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

Anika Therapeutics, Inc. develops, manufactures and commercializes therapeutic products for tissue protection, healing and repair. The Company's products are based on hyaluronic acid (HA), a naturally occurring, biocompatible polymer found throughout the body. The Company's wholly owned subsidiary Anika S.r.l., has about 20 products commercialized primarily in Europe. These products are also all made from HA, based on two technologies: HYAFF, which is a solid form of HA and ACP gel, an autocross-linked polymer of HA. The Company's technologies for modifying the HA molecule allow product properties to be tailored specifically to therapeutic use. The Company offers therapeutic products from these technologies in the areas of: Orthobiologics, Dermal (Advanced wound care and Aesthetic dermatology), Surgical (Anti-adhesion and Ear, nose and throat care (ENT)), Ophthalmic and Veterinary.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (19.77) relative to the growth rate (37.67%), 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 ANIK (0.52) makes it 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. ANIK, whose sales are $99.8 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate.


INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for ANIK was 11.75% last year, while for this year it is 16.06%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (4.31%) is below 5%.


EPS GROWTH RATE: PASS

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for ANIK is 37.7%, 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 ANIK (0.00%) to be wonderfully low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for ANIK (4.43%) 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 ANIK (20.97%) 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.

UNIVERSAL FOREST PRODUCTS, INC.

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

Universal Forest Products, Inc. is a holding company. The Company, through its subsidiaries, supplies wood, wood composite and other products to three primary markets: retail, construction and industrial. Its industrial market serves as industrial manufacturers and other customers for packaging, material handling and other applications. The Company's segments include North, South, West, Alternative Materials, International and Corporate divisions. The Company designs, manufactures and markets wood and wood-alternative products for national home centers and other retailers, structural lumber and other products for the manufactured housing industry, engineered wood components for residential and commercial construction, and specialty wood packaging, components and packing materials for various industries. The Company's construction market consists of customers in three submarkets, including manufactured housing, residential construction and commercial construction.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (18.61) relative to the growth rate (62.44%), 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 UFPI (0.30) 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. UFPI, whose sales are $2,936.2 million, needs to have a P/E below 40 to pass this criterion. UFPI's P/E of (18.61) 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 UFPI was 12.78% last year, while for this year it is 10.56%. Since inventory to sales has decreased from last year by -2.22%, UFPI passes this test.


EPS GROWTH RATE: FAIL

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for UFPI is 62.4%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered too fast.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for UFPI (10.93%) 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 UFPI (6.61%) 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 UFPI (0.61%) 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.

BROCADE COMMUNICATIONS SYSTEMS, INC.

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

Brocade Communications Systems, Inc. is a supplier of networking hardware, software and services, including storage area networking (SAN) solutions, and Internet protocol (IP) networking solutions for businesses and organizations of various types and sizes. The Company has three operating segments: SAN Products, IP Networking Products and Global Services. The SAN Products segment includes infrastructure products and solutions that help customers develop and deploy storage and server consolidation, disaster recovery and data security. The IP Networking Products segment includes Layer 2 and Layer 3 Ethernet switches, and routers that are designed to connect users over private and public networks, including local area, metro, and within and across global data centers. The Global Services segment includes break/fix maintenance, installation, consulting, network management and software maintenance, and post-contract customer support revenue.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (9.81) relative to the growth rate (39.57%), 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 BRCD (0.25) 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. BRCD, whose sales are $2,261.5 million, needs to have a P/E below 40 to pass this criterion. BRCD's P/E of (9.81) 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 BRCD was 1.75% last year, while for this year it is 1.79%. Since inventory to sales has not changed appreciably, BRCD 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 BRCD is 39.6%, 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 BRCD (31.91%) 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 BRCD (8.73%) 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 BRCD (19.31%) 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.

FOOT LOCKER, INC.

Strategy: Contrarian Investor
Based on: David Dreman

Foot Locker, Inc. is a retailer of shoes and apparel. The Company operates in two segments: Athletic Stores and Direct-to-Customers. The Athletic Stores segment is an athletic footwear and apparel retailer whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction and SIX:02, as well as the retail stores of Runners Point Group, including Runners Point and Sidestep. The Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and the direct-to-customer subsidiary of Runners Point Group, which sell to customers through their Internet and mobile sites and catalogs. As of January 31, 2015, the Company operated 3,423 primarily mall-based stores in the United States, Canada, Europe, Australia and New Zealand. As of January 31, 2015, the Company operated a total of 78 franchised stores, of which 31 are in the Middle East, 27 in Germany and Switzerland, and 20 in the Republic of Korea.

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. FL has a market cap of $8,223 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. FL's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.57, 1.14 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. FL passes this test as its EPS growth rate over the past 6 months (35.71%) has beaten that of the S&P (-3.77%). FL's estimated EPS growth for the current year is (24.22%), which indicates the company is expected to experience positive earnings growth. As a result, FL passes this test.


This methodology would utilize four separate criteria to determine if FL 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. FL's P/E of 15.73, based on trailing 12 month earnings, is higher than the bottom 20% criterion (below 11.75), 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. FL's P/CF of 11.93 does not meet the bottom 20% criterion (below 6.65), 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. FL's P/B is currently 3.24, which does not meet the bottom 20% criterion (below 0.92), 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%). FL's P/D of 54.95 does not meet the bottom 20% criterion (below 19.01), 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 [2.66] or greater than 2). This is one identifier of financially strong companies, according to this methodology. FL's current ratio of 3.72 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 FL is 25.69%, while its historical payout ratio has been 28.29%. Therefore, it passes the payout criterion.


RETURN ON EQUITY: PASS

The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 16.12%, and would consider anything over 27% to be staggering. The ROE for FL of 21.43% 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. FL's pre-tax profit margin is 11.29%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. FL's current yield is 1.82%, while the market yield is 2.81%. FL 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 62.90%. FL's Total Debt/Equity of 5.09% is considered acceptable.

COMFORT SYSTEMS USA, INC.

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

Comfort Systems USA, Inc. is a provider of mechanical contracting services, which principally includes heating, ventilation and air conditioning (HVAC), plumbing, piping and controls, as well as off-site construction, electrical, monitoring and fire protection. It installs, maintains and repairs products and systems throughout its approximately 35 operating units in 81 cities and 89 locations throughout the United States. It operates primarily in the commercial, industrial and institutional HVAC markets and offers services for the industrial, healthcare, education, office, technology, retail and government facilities. It provides a range of construction, renovation, expansion, maintenance, repair and replacement services for mechanical and related systems in commercial, industrial and institutional properties. Its installation business related to newly constructed facilities involves the design, engineering, integration, installation and start-up of mechanical and related systems.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (21.47) relative to the growth rate (23.45%), based on the average of the 3 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for FIX (0.92) 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. FIX, whose sales are $1,596.9 million, needs to have a P/E below 40 to pass this criterion. FIX's P/E of (21.47) is considered acceptable.


INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for FIX was 2.57% last year, while for this year it is 2.49%. Since inventory to sales has not changed appreciably, FIX 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 FIX is 23.4%, based on the average of the 3 and 5 year historical eps growth rates, which is considered very good.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for FIX (16.14%) 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 FIX (5.85%) 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 FIX (0.23%) 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.

THOR INDUSTRIES, INC.

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

Thor Industries, Inc. (Thor), manufactures and sells various recreational vehicles (RV) throughout the United States and Canada, as well as related parts and accessories. The principal types of The Company's towable recreational vehicles that the Company produces include conventional travel trailers and fifth wheels. In addition, it also produces truck and folding campers and equestrian, and other specialty towable recreational vehicles, as well as Class A, Class C and Class B motorhomes. The Company operates through two segments: towable recreational vehicles and motorized recreational vehicles. The Company through its operating subsidiaries manufactures recreational vehicles in North America. The subsidiaries are Airstream, Inc., CrossRoads RV, Thor Motor Coach, Inc., Keystone RV Company, Heartland Recreational Vehicles, LLC, Livin' Lite RV, Inc., Bison Coach, K.Z., Inc. and Postle Operating, LLC.


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Smokestack (cyclical) companies with a Price/Sales ratio between .4 and .8 represent good values according to this methodology. THOpasses this test as its P/S of 0.78 based on trailing 12 month sales, falls within the "good values" range for cyclical companies.


TOTAL DEBT/EQUITY RATIO: PASS

Less debt equals less risk according to this methodology. THO's Debt/Equity of 0.00% is exceptional, 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. THO 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 THO At this Point

Is THO a "Super Stock"? NO


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-Smokestack(non-cyclical) companies with a Price/Sales ratio between .75 and 1.5 are good values. Otherwise, Smokestack(cyclical) companies with a Price/Sales ratio between .4 and .8 represent good values. THO's P/S ratio of 0.78 falls within the "good values " range for cyclical industries and is considered attractive.


LONG-TERM EPS GROWTH RATE: PASS

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. THO's inflation adjusted EPS growth rate of 16.97% 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. THO's free cash per share of 2.78 passes this criterion.


THREE YEAR AVERAGE NET PROFIT MARGIN: FAIL

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. THO, whose three year net profit margin averages 4.93%, fails this evaluation.

UNITED THERAPEUTICS CORPORATION

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

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. Its therapeutic products and product candidates include Prostacyclin Analogues, Phosphodiesterase Type 5 (PDE-5) Inhibitor and Monoclonal Antibody (MAb). Its Prostacyclin Analogues lead product is Remodulin (treprostinil) Injection. It also includes Tyvaso (treprostinil) Inhalation Solution and Orenitram (treprostinil) Extended-Release Tablets. Its subsidiary is developing another oral prostacyclin analogue for the treatment of pulmonary arterial hypertension (PAH) called esuberaprost. Its PDE-5 inhibitor is Adcirca (tadalafil) tablets are indicated for the treatment of PAH. Its Unituxin (dinutuximab) Injection in combination with granulocyte-macrophage colony-stimulating factor, interleukin-2 and 13-cis-retinoic acid is indicated for the treatment of pediatric patients with neuroblastoma.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (5.96) relative to the growth rate (37.84%), 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 UTHR (0.16) 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. UTHR, whose sales are $1,507.3 million, needs to have a P/E below 40 to pass this criterion. UTHR's P/E of (5.96) 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 UTHR was 5.19% last year, while for this year it is 5.55%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (0.35%) is below 5%.


EPS GROWTH RATE: 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 UTHR is 37.8%, 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 UTHR (0.31%) 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 UTHR (6.03%) 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 UTHR (18.06%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


Watch List

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

Ticker Company Name Current
Score
IIIN INSTEEL INDUSTRIES INC 85%
CAL CALERES INC 78%
WDC WESTERN DIGITAL CORP 75%
VSI VITAMIN SHOPPE INC 69%
DW DREW INDUSTRIES, INC. 66%
WLK WESTLAKE CHEMICAL CORPORATION 64%
EGBN EAGLE BANCORP, INC. 63%
SAFM SANDERSON FARMS, INC. 61%
CMI CUMMINS INC. 58%
CALM CAL-MAINE FOODS INC 57%



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