Economy & Markets

As the trade war with China heated up, the US announced another $200 billion of Chinese goods that could be targeted, after China retaliated for the tariffs on $34 billion of goods put in place last week.

The average price of gas is nearing $3 a gallon, the highest since 2014, and prices are higher in California and Washington state.

The percentage of small businesses that are not able to fill open jobs is 36% in June, matching the record high set in November 2000, according to the NFIB Research Center.

After falling for two straight weeks, mortgage application volume rose 2.5% in the most recent week, but volume is still 4.3% lower than a year ago, according to the Mortgage Bankers Association.

Producer prices rose more than expected in June, boosted by gains in the cost of services and motor vehicles. It was the biggest annual increase in more than 6 years.

Recommended Reading

Jamie Dimon and Warren Buffett recently wrote a commentary for The Wall Street Journal urging the nation's CEOs to stop providing quarterly earnings per share guidance. Short-term pressures have contributed to the decline in the number of publicly traded companies in the last two decades. Read more

Data from the National Association of College and University Business Officers shows that over 30 years, the universities with the largest endowments only narrowly outperformed the S&P 500, generating gains of 9.7% compared to 9.6% for the index. Read more

Pimco recently told clients to reduce risk in their corporate debt holdings and limit exposure to the Euro region's peripheral countries, seeing the potential for a US recession hitting in three to five years. Read more

Thomson Reuters says profit for companies in the S&P 500 rose 26% in the first quarter over the year earlier, but the Commerce Department data released in May said profit increased by 0.1% and that if the benefit from the tax cut was removed from the numbers, profit was down 6%. Read more

Rebalancing a portfolio based on explicit, rules-based adjustments rather than waiting for certain triggers can boost fund returns by between 0.5% and 1%, according to a recent article in Chief Investment Officer. Read more

George Soros said in a recent speech that Europe faced an imminent existential threat, driven by the surging dollar and an outflow of capital from emerging markets and the vacuum left after the US pulled out of the multi-nation Iran nuclear deal. Read more

In a recent interview, Judd Peters, a portfolio manager for the small cap value fund at Hotchkis & Wiley, says the best opportunities right now are in consumer discretionary, industrials and energy. Read more

Global stocks have recently lagged US stocks as concern about the health of emerging markets deepens. That has led investors to bring more money home. Read more

Bianco Research says 10-year Treasury yields have pushed higher than bonds of seven major developed countries for the first time since 2000, which The Wall Street Journal says was a sign investors are struggling to reconcile expectations for faster US growth with concern about deficits and inflation. Read more

A strong dollar, deregulation and tax cuts are boosting small cap stocks. The Russell 2000 is up 6% this year, about three times the return of the broader market, but these stocks can be more volatile, according to Barron's. Read more

News on Hot List Stocks

TriNet, which makes human resources solutions for small to midsize businesses, said the Internal Revenue Service designated one of its subsidiaries as a certified professional employer organization. The certification means TriNet can offer these solutions for its clients.

Acuity Brands said fiscal third quarter earnings per share were $2.37, beating Street expectations of $2.17. Net income was $73 million, down from $82.2 million in the same quarter last year.

Hot List Performance Update

Since our last newsletter, the S&P 500 returned 3.0%, while the Hot List returned 3.4%. So far in 2015, the portfolio has returned -5.6% vs. 4.7% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 243.3% vs. the S&P's 179.7% gain.

Mentally Preparing For, but Not Predicting, the Next Bear Market

Hoping for the best but preparing for the worst is a good rule-of-thumb, a maxim that can help us stay measured and mindful when it comes to dealing with life's inevitable ups and downs. But it can be hard to think about potential downs when the ups have been around for a while--and the current, nearly nine-year-old bull market is a perfect example of that.

Since March of 2009, the S&P 500, including dividends, is up over 350% as of this writing, and if the current run is sustained until August of this year, it will be the longest bull market in the history of the index. But nothing lasts forever, and the stock market is no exception -- which highlights how crucial it is for investors to resist complacency and maintain a realistic perspective.

Here's some perspective to consider: If you were to look at the day-to-day undulations in equity prices, you would see that stocks are positive just a little over half the time. In a 2016 article, Ben Carlson of Ritholtz Wealth Management wrote, "Stocks don't make new highs every single day, so most of the time you're going to be underwater from your portfolio's high-water mark. This means there are plenty of chances to be in a state of regret when investing in stocks." He points out that the last 90 years have seen bear markets almost one-quarter of the time. Half the time, he added, "you're down 5% or worse. It's difficult to appreciate this fact when looking at a long-term log scale stock chart that seems to only go up and to the right."

The table below, courtesy of Yardeni Research, shows both corrections and bear markets (the text in red) going back to 1928.

But knowing that a bear is laying somewhere in the weeds doesn't help an investor pinpoint when or where it will rear its head. That's not to say that signs of change cannot be identified -- recent research by Morgan Stanley analyzed S&P 500 trends since 1950 to identify patterns that might signal market change in the offing -- but such cues are not foolproof.

Signs that Market Change is Coming

Here are a few of the patterns that emerged from the Morgan Stanley study:

  • A widening of credit spreads, the research shows, provides a bearish market signal 3-12 months in advance, with government bonds (on average) peaking about 3 months before the S&P 500.
  • Global equities tend to rise steeply heading into a bear market, with emerging market shares rallying the most dramatically.
  • Rising bond yields, "largely because of the bull market macroeconomic backdrop that spurs growth and inflation." The research shows that U.S. 10-year Treasury yields have tended to rise by more than 100 basis points in the 12 months before a market peak.
  • A surge in commodities: The Morgan Stanley report says that crude oil, gold and copper have all historically witnessed double-digit increases in the 12 months before a bear market.

Signals, however, don't offer a crystal ball. There is no sure-fire way to know, or to predict, the coming of a bear market, and trying to guess can end up being a costly exercise. It's very tough to identify a market "top", for instance, and most people end up panicking and selling once stocks have already fallen heavily (when they should be buying). Moreover, even those fortunate enough to get out before a bear market hits are often too frightened to get back in to take advantage of a rebound.

Bear Market Tool Box

Instead of trying to predict when a downturn will happen, why not prepare for it? One of the best ways to do so is to establish an investment strategy aligned with your risk tolerance and financial goals--then stick with it.

Here are some things investors can do to prepare for the next downturn.

  • Know your risk tolerance. Think carefully about how much risk you can live with. It's easy to say you have thick investor skin when the markets are continuing to climb. The reality is, it's never pleasant to watch your hard-earned savings drop in value. To determine your risk tolerance, it's important to take into account the stage of your investing life, so to speak. For example, a Millennial might be inherently more risk tolerant than a Baby Boomer by virtue of their longer runway to retirement.
  • Set goals. Map out an investment plan that takes your goals into account, both on a short-term and long-term basis. For example, money you'll need in the short term (and therefore can't afford to lose) should be invested more conservatively. Money you won't be needing in the next five or more years, on the other hand, could be in more volatile assets offering potentially higher returns.
  • By investing in the mix of assets that best aligns with goals and risk tolerance, investors can increase their chances of ensuring gains in bull markets and enduring any losses that will occur in bear market periods.
  • Keep emotions out of the investment equation.It's a mistake to focus on market turbulence, news headlines, and the declarations of market pundits. That will only lead to emotionally-driven trades, which can be costly. Once you've established your investment goals and strategy, stick to both. That's the best defense against inevitable ups and downs.

It's been a great 9+ years for most U.S. stock investors, and market trends can continue longer than most people think. This bull market could have years left in it -- no one knows. But, one thing is certain and that is another bear market will come someday and it will be painful, scary and most likely appear out of nowhere. Investors who understand that bear markets come, and go, and plan in advance and prepare mentally will be the ones who come out ahead in the long run.

Portfolio Holdings
Ticker Date Added Return
SBCF 5/4/2018 17.0%
CACC 3/9/2018 6.8%
UFPI 6/1/2018 0.7%
SAFM 4/6/2018 -6.2%
SCHN 6/29/2018 5.2%
TNET 6/29/2018 -0.7%
NRZ 5/4/2018 2.0%
MGA 6/29/2018 3.2%
THO 4/6/2018 -11.8%
AYI 6/29/2018 14.2%


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

SBCF   |   CACC   |   UFPI   |   SAFM   |   SCHN   |   TNET   |   NRZ   |   MGA   |   THO   |   AYI   |  

SEACOAST BANKING CORPORATION OF FLORIDA

Strategy: Growth Investor
Based on: Martin Zweig

Seacoast Banking Corporation of Florida is a bank holding company. The Company's principal subsidiary is Seacoast National Bank, a national banking association (the Bank). The Company and its subsidiaries offer an array of deposit accounts and retail banking services, engage in consumer and commercial lending and provide a range of trust and asset management services, as well as securities and annuity products to its customers. The Company, through its bank subsidiary, provides a range of community banking services to commercial, small business and retail customers, offering a range of transaction and savings deposit products, treasury management services, brokerage, and secured and unsecured loan products, including revolving credit facilities, letters of credit and similar financial guarantees, and asset based financing. The Bank also provides trust and investment management services to retirement plans, corporations and individuals.


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. SBCF's P/E is 23.88, based on trailing 12 month earnings, while the current market PE is 37.00. 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. SBCF's revenue growth is 30.77%, while it's earnings growth rate is 33.18%, based on the average of the 3 and 4 year historical eps growth rates. Therefore, SBCF passes 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 (36%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (34.4%) of the current year. Sales growth for the prior must be greater than the latter. For SBCF 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. SBCF's EPS ($0.38) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. SBCF's EPS for this quarter last year ($0.20) 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. SBCF's growth rate of 90.00% 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 SBCF is 16.59%. This should be less than the growth rates for the 3 previous quarters, which are 28.57%, 33.33%, and 64.29%. SBCF 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, 45.45%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 90.00%, (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, 90.00% must be greater than or equal to the historical growth which is 33.18%. SBCF would therefore pass this test.


EARNINGS PERSISTENCE: FAIL

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. SBCF, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.44, 0.21, 0.66, 0.78, and 1.19, fails this test.


LONG-TERM EPS GROWTH: PASS

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. SBCF's long-term growth rate of 33.18%, based on the average of the 3 and 4 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 SBCF, this criterion has not been met (insider sell transactions are 66, while insiders buying number 472). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.

CREDIT ACCEPTANCE CORP.

Strategy: Patient Investor
Based on: Warren Buffett

Credit Acceptance Corporation offers financing programs that enable automobile dealers to sell vehicles to consumers. The Company's financing programs are offered through a network of automobile dealers. The Company has two Dealers financing programs: the Portfolio Program and the Purchase Program. Under the Portfolio Program, the Company advances money to dealers (Dealer Loan) in exchange for the right to service the underlying consumer loans. Under the Purchase Program, the Company buys the consumer loans from the dealers (Purchased Loan) and keeps the amounts collected from the consumer. Dealer Loans and Purchased Loans are collectively referred to as Loans. As of December 31, 2016, the Company's target market included approximately 60,000 independent and franchised automobile dealers in the United States. The Company has market area managers located throughout the United States that market its programs to dealers, enroll new dealers and support active dealers.

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 2.16, 4.61, 5.67, 7.07, 8.58, 10.54, 11.92, 14.28, 16.31, 29.14. Buffett would consider CACC's earnings predictable. In fact EPS have increased every year. CACC's long term historical EPS growth rate is 30.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 16.0% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers.


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 CACC, over the last ten years, is 31.1%, 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 19.6%, 28.7%, 32.7%, 33.6%, 33.3%, 32.2%, 35.0%, 31.3%, 27.6%, 36.6%, and the average ROE over the last 3 years is 31.8%, 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 CACC, over the last ten years, is 9.6%, 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 5.8%, 12.2%, 11.5%, 10.3%, 9.7%, 9.9%, 8.8%, 8.6%, 7.7%, 11.3%, 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. CACC's free cash flow per share of $28.51 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 $110.28 and compares it to the gain in EPS over the same period of $26.98. CACC's management has proven it can earn shareholders a 24.5% 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. CACC's shares outstanding have fallen over the past five years from 22,940,001 to 19,000,000, 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 CACC 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 $30.58 and divide it by the current market price of $362.69. An investor, purchasing CACC, could expect to receive a 8.43% initial rate of return. Furthermore, he or she could expect the rate to increase 16.0% per year, based on the analysts' consensus estimated long term growth rate, 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 2.75%. Compare this with CACC's initial yield of 8.43%, which will expand at an annual rate of 16.0%, based on the analysts' consensus estimated long term growth rate. 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]

CACC currently has a book value of $85.74. It is safe to say that if CACC can preserve its average rate of return on equity of 31.1% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 31.1% and it will have a book value of $1,281.44 in ten years. If it can still earn 31.1% on equity in ten years, then expected EPS will be $397.94.


CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]

Now take the expected future EPS of $397.94 and multiply them by the lower of the 5 year average P/E ratio (12.4) or current P/E ratio (current P/E in this case), which is 11.9 and you get CACC's projected future stock price of $4,719.55.


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 $0.00. This gives you a total dollar amount of $4,719.55. These numbers indicate that one could expect to make a 29.3% average annual return on CACC'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 16.0%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $134.90. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (12.4) or current P/E ratio (current P/E in this case), which is 11.9. This equals the future stock price of $1,599.93. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $1,599.93.


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 $362.69 and the future expected stock price, including the dividend pool, of $1,599.93. If you were to invest in CACC at this time, you could expect a 16.00% average annual return on your money. Buffett would consider this a great 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 16.0% and 29.3%. 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 22.6% on CACC stock for the next ten years, based on the current fundamentals. Buffett would consider this an exceptional return, thus passing the criterion.

UNIVERSAL FOREST PRODUCTS, INC.

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

Universal Forest Products, Inc. is a holding company. The Company, through its subsidiaries, supplies wood, wood composite and other products to three primary markets, such as retail, construction and industrial. Its segments include North, South, West, Alternative Materials, International, idX Holdings, Inc. (idX) and Corporate divisions. idX is a designer, manufacturer and installer of in-store environments. It 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; specialty wood packaging, components and packing materials for various industries, and customized interior fixtures used in a range of retail stores, commercial and other structures. Its customers comprising retail market are national home center retailers and retail-oriented regional lumberyards, among others.


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. UFPIpasses this test as its P/S of 0.56 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. UFPI's Debt/Equity of 29.13% is acceptable, thus passing the test.


PRICE/RESEARCH RATIO: PASS

This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. UFPI 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 UFPI At this Point

Is UFPI 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. UFPI's P/S ratio of 0.56 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%. UFPI's inflation adjusted EPS growth rate of 31.16% 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. UFPI's free cash per share of 0.76 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. UFPI, whose three year net profit margin averages 2.98%, fails this evaluation.

SANDERSON FARMS, INC.

Strategy: Value Investor
Based on: Benjamin Graham

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


SECTOR: PASS

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


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $1 billion. SAFM's sales of $3,437.3 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: PASS

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. SAFM's current ratio of 4.64 passes the test.


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

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for SAFM is $0.0 million, while the net current assets are $631.7 million. SAFM passes this test.


LONG-TERM EPS GROWTH: FAIL

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


P/E RATIO: PASS

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. SAFM's P/E of 10.60 (using the 3 year PE) passes this test.


PRICE/BOOK RATIO: PASS

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. SAFM's Price/Book ratio is 1.60, while the P/E is 10.60. SAFM passes the Price/Book test.

SCHNITZER STEEL INDUSTRIES, INC.

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

Schnitzer Steel Industries, Inc. is a recycler of ferrous and nonferrous scrap metal, including end-of-life vehicles, and a manufacturer of finished steel products. The Company operates through two segments: the Auto and Metals Recycling (AMR) business and the Steel Manufacturing Business (SMB). The AMR segment collects and recycles auto bodies, rail cars, home appliances, industrial machinery, manufacturing scrap and construction and demolition scrap from bridges, buildings and other infrastructure. AMR's primary products include recycled ferrous and nonferrous scrap metal. The SMB segment produces finished steel products such as rebar, wire rod, coiled rebar, merchant bar and other specialty products using 100% recycled metal sourced from AMR. SMB's products are primarily used in nonresidential and infrastructure construction in North America. SMB operates a steel mini-mill in McMinnville, Oregon that produces finished steel products using recycled metal and other raw materials.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (9.46) relative to the growth rate (39.97%), 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 SCHN (0.24) 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. SCHN, whose sales are $2,189.4 million, needs to have a P/E below 40 to pass this criterion. SCHN's P/E of (9.46) 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 SCHN was 9.83% last year, while for this year it is 9.89%. Since inventory to sales has not changed appreciably, SCHN 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 SCHN is 40.0%, based on the average of the 3 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 SCHN (28.08%) 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 SCHN (3.53%) 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 SCHN (-15.98%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.

TRINET GROUP INC

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

TriNet Group, Inc. is a provider of human resources (HR) solutions for small to medium-sized businesses (SMBs). The Company's HR solutions include services, such as multi-state payroll processing and tax administration, employee benefits programs, including health insurance and retirement plans, workers' compensation insurance and claims management, employment and benefit law compliance, and other services. The Company provides an HR technology platform with online and mobile tools that allow its clients and their worksite employees (WSEs) to store, view and manage their HR-related information and conduct a range of HR-related transactions anytime and anywhere. The Company's HR products and solutions include capabilities, such as technology platform, HR expertise, benefits and compliance. The Company's clients are distributed across a range of industries, including technology, life sciences, financial services, property management, retail, manufacturing and hospitality.


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. TNET, with a market cap of $3,876 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. TNET, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.06, 0.22, 0.44, 0.85 and 2.49, 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. TNET's Price/Sales ratio of 1.16, 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. TNET, whose relative strength is 88, is in the top 50 and would pass this last criterion.

NEW RESIDENTIAL INVESTMENT CORP

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

New Residential Investment Corp. is a real estate investment trust (REIT). The Company focuses on investing in, and managing, investments related to residential real estate. The Company's segments include investments in excess mortgage servicing rights (Excess MSRs); investments in mortgage servicing rights (MSRs); investments in servicer advances; investments in real estate securities; investments in residential mortgage loans; investments in consumer loans, and corporate. Its portfolio includes mortgage servicing related assets, residential mortgage backed securities (RMBS), residential mortgage loans and other investments. The Company's servicing related assets include its investments in Excess MSRs, MSRs and servicer advances. The Company invests in agency RMBS and non-agency RMBS. The Company's other investments consist of consumer loans.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (4.08) relative to the growth rate (24.79%), 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 NRZ (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. NRZ, whose sales are $2,687.7 million, needs to have a P/E below 40 to pass this criterion. NRZ's P/E of (4.08) 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 NRZ is 24.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

NRZ 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. NRZ's Equity/Assets ratio (26.00%) 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. NRZ's ROA (7.05%) 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 NRZ (7.87%) 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 NRZ (-110.58%) 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.

MAGNA INTERNATIONAL INC. (USA)

Strategy: Growth Investor
Based on: Martin Zweig

Magna International Inc. (Magna) is a global automotive supplier. The Company's segments are North America, Europe, Asia, Rest of World, and Corporate and Other. The Company's product capabilities include producing body, chassis, exterior, seating, powertrain, electronic, active driver assistance, vision, closure, and roof systems and modules, as well as vehicle engineering and contract manufacturing. The Company has over 320 manufacturing operations and approximately 100 product development, engineering and sales centers in over 30 countries. It provides a range of body, chassis and engineering solutions to its original equipment manufacturer (OEM) customers. It has capabilities in powertrain design, development, testing and manufacturing. It offers bumper fascia systems, exterior trim and modular systems. It offers exterior and interior mirror systems. It offers sealing, trim, engineered glass and module systems. It offers softtops, retractable hardtops, modular tops and hardtops.


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. MGA's P/E is 9.77, based on trailing 12 month earnings, while the current market PE is 37.00. 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. MGA's revenue growth is 3.93%, while it's earnings growth rate is 12.66%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, MGA 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 (21.3%) 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 MGA 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. MGA's EPS ($1.83) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. MGA's EPS for this quarter last year ($1.50) pass this test.


POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS

The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. MGA's growth rate of 22.00% 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 MGA is 6.33%. This should be less than the growth rates for the 3 previous quarters which are 4.96%, 5.43% and 18.55%. MGA does not pass this test, which means that it does not have good, reasonably steady earnings.


This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below.


EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: PASS

If the growth rate of the prior three quarter's earnings, 9.39%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 22.00%, (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, 22.00% must be greater than or equal to the historical growth which is 12.66%. MGA 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. MGA, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 3.38, 4.44, 4.72, 5.16 and 5.84, 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. MGA's long-term growth rate of 12.66%, based on the average of the 3, 4 and 5 year historical eps growth rates, fails the minimum required.


TOTAL DEBT/EQUITY RATIO: PASS

A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. MGA's Debt/Equity (30.56%) is not considered high relative to its industry (159.28%) and passes this test.

THOR INDUSTRIES, INC.

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

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


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. THO, with a market cap of $5,226 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. THO, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 2.86, 3.29, 3.79, 4.91 and 7.09, 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. THO's Price/Sales ratio of 0.62, based on trailing 12 month sales, passes this criterion.


RELATIVE STRENGTH: FAIL

The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. THO has a relative strength of 39. This does not pass the final criterion. As a result, this methodology would not consider the stock even though it passed the previous three criteria.

ACUITY BRANDS, INC.

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

Acuity Brands, Inc. is a provider of lighting solutions for commercial, institutional, industrial, infrastructure and residential applications throughout North America. The Company offers a portfolio of indoor and outdoor lighting and building management solutions for commercial, industrial, infrastructure and residential applications. The portfolio of lighting solutions include lighting products utilizing fluorescent, light emitting diode (LED), organic LED (OLED), high intensity discharge, metal halide, and incandescent light sources to illuminate a number of applications. The solutions portfolio of the Company includes modular wiring, LED drivers, sensors, glass and inverters sold primarily to original equipment manufacturers (OEMs). Its lighting and building management solutions are marketed under various brand names, including Lithonia Lighting and Holophane. Through its subsidiary, IOTA Engineering, L.L.C., the Company provides emergency lighting products and power equipment.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (18.30) relative to the growth rate (23.47%), 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 AYI (0.78) 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. AYI, whose sales are $3,576.5 million, needs to have a P/E below 40 to pass this criterion. AYI's P/E of (18.30) 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 AYI was 8.97% last year, while for this year it is 9.37%. 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 (0.41%) 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 AYI is 23.5%, based on the average of the 3, 4 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 AYI (22.37%) 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 AYI (3.94%) 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 AYI (-0.86%) 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
MU MICRON TECHNOLOGY, INC. 63%
LGIH LGI HOMES INC 54%
GME GAMESTOP CORP. 54%
PLCE CHILDRENS PLACE INC 49%
AGX ARGAN, INC. 49%
DHI D. R. HORTON INC 46%
ESNT ESSENT GROUP LTD 45%
WDFC WD-40 COMPANY 43%
TTGT TECHTARGET INC 42%
APPF APPFOLIO INC 42%



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