The Economy

After going through a rough patch in March, the US economy appears to have rebounded quite nicely, with the latest data showing gains in the industrial, housing, and retail sectors.

Industrial production jumped in April, rising 0.7% , according to a new Federal Reserve report. Manufacturing output rose 0.3%, an encouraging sign, while utility output (which tends to be seasonally driven) was up 5.8%. Mining output fell 2.3%. While April's industrial report was strong, it should be noted that March's result -- initially measured as a 0.6% decline -- was revised lower to a 0.9% decline.

Retail and food service sales, meanwhile, surged 1.3% in April, according to a new report from the Census Bureau, with a big rebound in auto sales leading the way. Compared to the year-ago period, retail and food service sales were up a solid 2.9% year-over-year.

The housing sector was also part of the April bounce-back. Housing starts rose 6.6%, according to the Census Bureau, thought they are about 0.5% below year-ago levels. Permit issuance for new construction rose 3.6%, but is about 7.2% below where it stood a year ago.

Inflation picked up significantly in April with the Consumer Price Index rising at a 4.8% annualized pace, spurred by major increases in energy prices. Core inflation (which strips out volatile food and energy prices) rose at half that pace. Compared to a year ago, prices are 1.1% higher; core prices are 2.1% higher.

Oil and gas prices are continuing to rebound. Oil prices are moving close to the $50 per barrel level, while a gallon of regular unleaded on average cost $2.23 on May 17, up from $2.11 a month earlier, according to AAA. That's still about 17% below where it was a year ago.

Since our last newsletter, the S&P 500 returned -0.5%, while the Hot List returned -1.3%. So far in 2016, the portfolio has returned -2.8% vs. -0.2% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 174.0% vs. the S&P's 103.9% gain.

Portfolio Update: Swimming Upstream

Stocks have stumbled a bit recently, in part because of renewed concerns that the Federal Reserve will again raise interest rates this summer. The Hot List has been impacted, with eight of its ten holdings falling since our last newsletter (performance figures here and below as of Thursday morning trading). The moves weren't particularly big, however, with no stock moving more than 5%.

Our top performer was United Therapeutics Corporation (UTHR), which makes drugs to treat pulmonary arterial hypertension. Its shares are up more than 3% since our last newsletter. There was no major catalyst for the gains. United shares slumped earlier this year during the market downturn, and then were hit again in late April after the firm announced earnings and sales results that were very strong compared to last year but short of expectations. The recent gains may be a case of investors recognizing that the stock was hit too hard.

Another drugmaker, Anika Therapeutics (ANIK), was up about 2.4%, meanwhile. Anika was upgraded by Singular Research on May 9, which may have helped push shares higher.

The worst performer since our last newsletter was Foot Locker (FL), which was down close to 5%. It and a number of other retailers were hit hard last week amid reports of Amazon taking more market share away from store-based retailers. But Foot Locker's shares actually appeared to be buoyed a bit this week after Deutsche Bank reiterated its "buy" rating on the stock.

Other laggards included Universal Forest Products (UFPI) and Argentina's Banco Macro (BMA), which were both down in the 4% range. Neither stock appeared to have a specific catalyst, so both moves may have just been normal short term noise.

So far, 2016 has been an up and down year for both the Hot List and the broader market. We remain confident in our long term approach, however, and in two weeks we will perform our regularly scheduled rebalancing. At that time we will sell any holdings whose relative scores have fallen significantly and replace them with new stocks that score highly on my models. Until then, stay disciplined.

Recommended Reading

In our last newsletter, I talked about the excellent relative valuation of small-caps and mid-caps compared to large stocks right now. But while the data points to a nice opportunity in smaller stocks, investors need to be careful when investing in small companies, which Mark Hulbert notes in a recent Barron's column.

As Hulbert points out, smaller stocks have outperformed large caps over the long term, but "for the past five years the Russell 1000 (which contains the 1,000 largest U.S. stocks) has beaten the Russell 2000 (the next 2000 by market value) by nearly five percentage points per year". That recent trend has started to shift in 2016. In anticipation of improved performance from small caps, Hulbert outlines two mistakes that investors should be aware of and avoid making when allocating to small cap strategies and/or selecting small cap stocks.

Mistake #1: Beware of Style Drift. Hulbert points out that many funds that call themselves small cap funds may in fact hold larger cap names. According to the article, researchers of style drift have found "that the average small-cap fund with a heavy large-cap exposure returned 6.1% per year less than the typical small-cap fund that invested only in small stocks."

Mistake #2: Consider Quality Small Caps (Avoid the Junk). When investing in small names, investors should consider financial quality -- "profitability, profit growth, volatility, stability of earnings, a high dividend payout ratio and a conservative investment policy" -- these are some of the factors that AQR Capital Management found to be important when identifying small caps that have the ability to outperform.

Investing in smaller stocks can lead to big rewards over the long haul, and right now the opportunities in the small-cap space seem particularly attractive. But as Hulbert's data shows, you have to be careful when making the "little guys" part of your portfolio.



Guru Spotlight: Ken Fisher on "The Glitch"

Most investors don't have the patience to deal with problems. They are gung ho on a company and its shares until the water gets choppy. Then, unable to deal with some short-term turbulence in business performance and/or stock performance, they jump ship.

In his classic book Super Stocks, Kenneth Fisher talked about how disciplined investors can profit from those impatient short-term thinkers. Fisher believed that young, fast-growing companies were the best way to make big profits on Wall Street. But he said that investors needed to understand the cycles involved in a company's growth in order to take advantage of these firms' success.

When young companies start to thrive, Fisher found, investors raised expectations to unrealistic levels. Eventually, these darlings of Wall Street have a setback -- maybe their earnings drop, or maybe they continue to grow but simply don't keep pace with investors' lofty expectations -- and their stocks can then plummet as investors overreact and sell, thinking they've been led astray. "Instead of appreciating a normal sign of evolution, many investors condemn a company that fails to live up to their expectations," Fisher wrote. "Disappointed, Wall Street finds it easier to blame management ineptitude than to see its own prior excesses. As disenchantment with the stock becomes more pervasive, its price tumbles further and further."

But while investors overreact, Fisher believed that these "glitches" are often simply a part of a firm's maturation. "The best managements reacts to difficulties and overcome them," he wrote. "In time, sales pick up. Later, profits begin to pick up. Simultaneously with the profit resurgence, the stock price begins to rebound." If you can buy a stock when it hits a glitch and its earnings and price are down, you can make a bundle by sticking with it until it rights the ship and other investors jump back on board.

The trick is evaluating a company during those periods when its earnings are in flux, or even negative, so that you can find good candidates for a rebound (remember, you can't use a P/E ratio to evaluate a company that is losing money, because it has no earnings). The answer, Fisher said, was to look at sales, and the price/sales ratio, which compares the total market capitalization of a company to its annual sales.

Here's how Fisher says a "glitch" plays out in the short term in terms of earnings and sales:

Screen Shot 2016-05-19 at 12.43.02 PM

Over the longer term, however, the glitch looks far less menacing:

Screen Shot 2016-05-19 at 12.40.15 PM

As these charts indicate, earnings can be highly volatile, including the earnings of good companies, while sales rarely decline for top-flight businesses. They may be flat, but they generally tend to be less volatile than earnings. Earnings, however, can be moved quickly and dramatically by a wide variety of variables that do not necessarily portend how the company will perform, such as changes in accounting procedures or in the amount of research and development the company engages in. Wall Street focuses on earnings and abandons companies with earnings troubles, even if those earnings dips are likely to be short lived, which is why Fisher liked to look at sales.

Part of Fisher's thinking was that, if a company has a low PSR, even a slight improvement in its profit margins can produce a big gain in earnings, which will then drive the stock's price up since most investors react to earnings. Companies with high PSRs don't have this leverage.

Another part of Fisher's thinking was that investors should focus on causes, not results, when it came to evaluating a firm's prospects. "What is the bottom line?" he wrote. "To buy stocks successfully, you need to price them based on causes, not results. The causes are business conditions -- products with a cost structure allowing for sales. The results flow from there -- profits, profit margins, and finally earnings per share."

More than 30 years after he wrote Super Stocks, I think Fisher's "glitch" advice still probably holds true. But to me, one of the most important lessons to take from his discussion of the glitch is broader in nature: Good companies -- even great companies -- go through difficult periods. The business world yes messy; competition is fierce and unrelenting. In that sort of environment, it's impossible for a company to start strong, and continue to improve without any hiccups.

Just look at Apple. It set the world on fire from the early 2000s up until just a year or two ago. Now growth has slowed -- it had to eventually. But many investors are seeing the slowdown in growth as a death knell, and Apple shares have been sinking. Apple appears to have strong management and a great brand, however, and the declines are likely allowing value-conscious investors to get shares of a great firm at a very good price -- I think that's what Warren Buffett and company were thinking when they recently snatched up $1 billion worth of Apple shares.

What great investors like Buffett and Fisher know is that the impatience and short term thinking of the masses create big opportunities for savvy investors. The trick is having the stomach to take action when fear is hanging over a stock or the broader market and the masses are heading for the hills. That's no small task, but doing so gives you a chance to succeed where so many other investors fail.



News about Validea Hot List Stocks

Gannett Inc. (GCI): Gannett upped its offer for Tribune Publishing from $12.25 per share to $15, Investopedia reported. Tribune called the initial offer a "non-starter", and adopted a poison pill defense that would dilute anyone's stake in the company who buys more than 20% of the firm. Gannett's offer is all-cash and includes assuming Tribune's $385 million worth of debt. The total bid is now $864 million, up from the original $815 million, according to Investopedia. Tribune says it will consider the new offer.



The Next Issue

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

Portfolio Holdings
Ticker Date Added Return
THO 2/12/2016 26.4%
ANIK 5/6/2016 2.2%
HOMB 5/6/2016 -1.2%
FIX 5/6/2016 -3.7%
BRCD 5/6/2016 -1.4%
UTHR 5/6/2016 2.4%
BMA 11/20/2015 -11.8%
UFPI 5/6/2016 -4.6%
GCI 5/6/2016 -1.0%
FL 4/8/2016 -5.4%


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

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

THOR INDUSTRIES, INC.

Strategy: Value Investor
Based on: Benjamin Graham

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.


SECTOR: PASS

THO 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. THO's sales of $4,237.8 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. THO's current ratio of 2.19 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 THO is $0.0 million, while the net current assets are $470.9 million. THO 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. THO's EPS growth over that period of 34.9% passes the EPS growth test.


P/E RATIO: FAIL

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. THO's P/E of 18.90 (using the 3 year PE) fails 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. THO's Price/Book ratio is 2.91, while the P/E is 18.90. THO 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 (20.20) 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 (0.54) 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 (4.33%) 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 (20.52%) 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.

HOME BANCSHARES INC

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

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.


PROFIT MARGIN: PASS

This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. HOMB's profit margin of 33.38% passes this test.


RELATIVE STRENGTH: FAIL

The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. Although HOMB's relative strength of 86 is below the acceptable level, yet it is very close. Keep an eye on the stock as it could move into the acceptable range.


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

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for HOMB (28.26% for EPS, and 25.51% for Sales) are good enough to pass.


INSIDER HOLDINGS: PASS

HOMB's insiders should own at least 10% (they own 15.30% ) of the company's outstanding shares which is the minimum required. A high percentage typically indicates that the insiders are confident that the company will do well.


CASH FLOW FROM OPERATIONS: PASS

A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. HOMB's free cash flow of $2.29 per share passes this test.


PROFIT MARGIN CONSISTENCY: PASS

HOMB's profit margin has been consistent or even increasing over the past three years (Current year: 36.62%, Last year: 33.66%, Two years ago: 30.64%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.


R&D AS A PERCENTAGE OF SALES: NEUTRAL

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


CASH AND CASH EQUIVALENTS: PASS

HOMB's level of cash $111.3 million passes this criteria. If a company is a cash generator, like HOMB, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.


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

The "Fool Ratio" is an extremely important aspect of this analysis. If the company's Fool Ratio is between 0.5 and 0.65 (HOMB's is 0.61), the company demonstrates excellence in its fundamentals and have soundly beat the earnings estimates. HOMB passes this test.

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

AVERAGE SHARES OUTSTANDING: PASS

HOMB has not been significantly increasing the number of shares outstanding within recent years which is a good sign. HOMB currently has 70.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.


SALES: PASS

Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. HOMB's sales of $398.8 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". HOMB passes the sales test.


DAILY DOLLAR VOLUME: PASS

HOMB passes the Daily Dollar Volume (DDV of $10.4 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf."


PRICE: PASS

This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. HOMB with a price of $41.09 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.


INCOME TAX PERCENTAGE: PASS

HOMB's income tax paid expressed as a percentage of pretax income this year was (36.75%) and last year (36.19%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.

COMFORT SYSTEMS USA, INC.

Strategy: Growth Investor
Based on: Martin Zweig

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.


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. FIX's P/E is 21.05, based on trailing 12 month earnings, while the current market PE is 14.00. 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. FIX's revenue growth is 7.04%, while it's earnings growth rate is 23.45%, based on the average of the 3 and 5 year historical eps growth rates. Therefore, FIX fails this criterion.


SALES GROWTH RATE: FAIL

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (4.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (7.7%) of the current year. Sales growth for the prior must be greater than the latter. For FIX 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. FIX's EPS ($0.26) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. FIX's EPS for this quarter last year ($0.14) 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. FIX's growth rate of 85.71% 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 FIX is 11.72%. This should be less than the growth rates for the 3 previous quarters, which are 191.67%, 130.00%, and 25.00%. FIX 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, 93.33%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 85.71%, (versus the same quarter one year ago) then the stock fails, with one exception: if the growth rate in earnings between the current quarter and the same quarter one year ago is greater than 30%, then the stock would pass. The growth rate over this period for FIX is 85.7%, and it would therefore pass this test.


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

The EPS growth rate for the current quarter, 85.71% must be greater than or equal to the historical growth which is 23.45%. FIX 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. FIX, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were -1.02, 0.62, 0.73, 0.61, and 1.30, 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. FIX's long-term growth rate of 23.45%, based on the average of the 3 and 5 year historical eps growth rates, passes this test.


TOTAL DEBT/EQUITY RATIO: PASS

A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. FIX's Debt/Equity (16.14%) is not considered high relative to its industry (58.14%) and passes this test.


INSIDER TRANSACTIONS: PASS

A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For FIX, this criterion has not been met (insider sell transactions are 158, while insiders buying number 76). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.

BROCADE COMMUNICATIONS SYSTEMS, INC.

Strategy: Value Investor
Based on: Benjamin Graham

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.


SECTOR: FAIL

BRCD is in the Technology sector, which is one sector that this methodology avoids. Technology and financial stocks were considered too risky to invest in when this methodology was published. At that time they were not the driving force of the market as they are today. Although this methodology would avoid BRCD, we will provide the rest of the analysis, as we feel times have changed.


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. BRCD's sales of $2,261.5 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: PASS

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. BRCD's current ratio of 3.43 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 BRCD is $798.1 million, while the net current assets are $1,176.2 million. BRCD 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. BRCD's EPS growth over that period of 185.5% 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. BRCD's P/E of 13.50 (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. BRCD's Price/Book ratio is 1.28, while the P/E is 13.50. BRCD passes the Price/Book test.

UNITED THERAPEUTICS CORPORATION

Strategy: Value Investor
Based on: Benjamin Graham

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.


SECTOR: PASS

UTHR 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. UTHR's sales of $1,507.3 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. UTHR's current ratio of 3.64 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 UTHR is $0.0 million, while the net current assets are $942.5 million. UTHR 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. UTHR's EPS growth over that period of 625.7% 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. UTHR's P/E of 14.90 (using the 3 year 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. UTHR's Price/Book ratio is 2.89, while the P/E is 14.90. UTHR fails the Price/Book test.

BANCO MACRO SA (ADR)

Strategy: Contrarian Investor
Based on: David Dreman

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.

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. BMA has a market cap of $3,555 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. BMA's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.23, 2.39 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. BMA passes this test as its EPS growth rate over the past 6 months (1,738.46%) has beaten that of the S&P (-8.84%). BMA's estimated EPS growth for the current year is (1,067.24%), which indicates the company is expected to experience positive earnings growth. As a result, BMA passes this test.


This methodology would utilize four separate criteria to determine if BMA 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: PASS

The P/E of a company should be in the bottom 20% of the overall market. BMA's P/E of 9.81, based on trailing 12 month earnings, meets the bottom 20% criterion (below 11.75), and therefore passes 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. BMA's P/CF of 9.36 does not meet the bottom 20% criterion (below 6.57), 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. BMA's P/B is currently 3.12, which does not meet the bottom 20% criterion (below 0.90), 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%). BMA's P/D of 232.56 does not meet the bottom 20% criterion (below 18.48), 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.


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 BMA is 0.00%, while its historical payout ratio has been 19.64%. 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 BMA of 36.60% 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. BMA's pre-tax profit margin is 42.21%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. BMA's current yield is 0.43%, while the market yield is 2.84%. BMA fails this test.

UNIVERSAL FOREST PRODUCTS, INC.

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

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.


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. UFPI, with a market cap of $1,623 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. UFPI, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.23, 1.21, 2.15, 2.86 and 3.99, 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. UFPI's Price/Sales ratio of 0.55, 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. UFPI, whose relative strength is 91, is in the top 50 and would pass this last criterion.

GANNETT CO INC

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

Gannett Co., Inc. is an international, multi-platform news and information company. The Company is a local content provider in the United States, operating in over 30 states and Guam. Its operations comprise approximately 110 daily publications and digital platforms in the United States and the United Kingdom, over 400 non-daily publications in the United States, and approximately 150 such titles in the United Kingdom. Its daily publications in the United States include USA TODAY. Together with over 20 daily paid-for publications, its Newsquest division operates in the United Kingdom. Its operations also include commercial printing, marketing and data services operations. In the markets it serves, it also operates desktop, smartphone and tablet products. USA TODAY has a total daily circulation of approximately four million and Sunday circulation of over 3.9 million, which includes daily print, digital replica, digital non-replica and branded editions.


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. GCI's P/S of 0.66 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors.


TOTAL DEBT/EQUITY RATIO: PASS

Less debt equals less risk according to this methodology. GCI'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. GCI 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 GCI At this Point

Is GCI a "Super Stock"? NO


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.GCI's P/S ratio of 0.66 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors.


LONG-TERM EPS GROWTH RATE: FAIL

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. GCI's inflation adjusted EPS growth rate of 3.06% fails 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. GCI's free cash per share of 1.36 passes this criterion.


THREE YEAR AVERAGE NET PROFIT MARGIN: PASS

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. GCI, whose three year net profit margin averages 6.65%, passes this evaluation.

FOOT LOCKER, INC.

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

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

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. FL, with a market cap of $7,968 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. FL, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.80, 2.58, 2.85, 3.56 and 3.84, 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. FL's Price/Sales ratio of 1.08, 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. FL has a relative strength of 60. This does not pass the final criterion. As a result, this methodology would not consider the stock even though it passed the previous three criteria.


Watch List

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

Ticker Company Name Current
Score
NHTC NATURAL HEALTH TRENDS CORP. 100%
SIMO SILICON MOTION TECHNOLOGY CORP. (ADR) 77%
AMSF AMERISAFE, INC. 67%
CAL CALERES INC 67%
FRAN FRANCESCA'S HOLDINGS CORP 61%
PII POLARIS INDUSTRIES INC. 59%
VLO VALERO ENERGY CORPORATION 54%
DW DREW INDUSTRIES, INC. 53%
WLK WESTLAKE CHEMICAL CORPORATION 51%
SANM SANMINA CORP 50%



Disclaimer

The names of individuals (i.e., the 'gurus') appearing in this report are for identification purposes of his methodology only, as derived by Validea.com from published sources, and are not intended to suggest or imply any affiliation with or endorsement or even agreement with this report personally by such gurus, or any knowledge or approval by such persons of the content of this report. All trademarks, service marks and tradenames appearing in this report are the property of their respective owners, and are likewise used for identification purposes only.

Validea is not registered as a securities broker-dealer or investment advisor either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. Validea is not responsible for trades executed by users of this site based on the information included herein. The information presented on this website does not represent a recommendation to buy or sell stocks or any financial instrument nor is it intended as an endorsement of any security or investment. The information on this website is generic by nature and is not personalized to the specific situation of any individual. The user therefore bears complete responsibility for their own investment research and should seek the advice of a qualified investment professional prior to making any investment decisions.

Performance results are based on model portfolios and do not reflect actual trading. Actual performance will vary based on a variety of factors, including market conditions and trading costs. Past performance is not necessarily indicative of future results. Individual stocks mentioned throughout this web site may be holdings in the managed portfolios of Validea Capital Management, a separate asset management firm founded by Validea.com founder John Reese. Validea Capital Management, which is a separate legal entity and an SEC registered investment advisory firm, uses, in part, the strategies on the web site to select stocks for its clients.