Economy & Markets

October was a month to forget for stock investors, with the major indexes erasing much of the gains they had made for the year. Investors seemed worried about a variety of factors, including the effects of rising interest rates and tariffs on corporate profit. Though earnings reports were largely positive, some executives did point out that their profit margins could get pinched if they couldn't figure out a way to pass costs on to customers. Rising interest rates and a strong dollar are also affecting investor sentiment. Some believe the Federal Reserve should put a halt to further rate increases, though the central bank seems determined to hike at least once more this year. All eyes will be on Friday's jobs report and what it says about wage gains, which many expect to push through a critical 3% threshold. Higher income is good for workers and economic output but could spell trouble for a stock market already reeling from a recent sell-off.

Some positive numbers:

1. U.S. online spending for holiday shopping is expected to increase nearly 15% this year, beating the expected 2.7% growth for traditional stores.

2. Consumer confidence rose to an 18-year high in October, driven largely a robust labor market.

3. Economic output expanded at a 3.5% annual rate, slightly better than expectations.

4. Productivity grew an annual 2.25% in the third quarter, a slowdown from the second quarter but still faster than recent years.

Some not-so-positive numbers:

1. Home price gains of 5.8% fell below 6% for the first time in a year, according to the August S&P Case-Shiller index.

2. The U.S. trade deficit in goods widened for a fourth straight month in September, bringing it to $76 billion, according to the Census Bureau.

Recommended Reading

Bloomberg recently reported that fewer stock pickers are beating their indexes, and that value managers are the worst performers. The article cites a Morningstar report on 4,500 active and passive mutual funds and ETFs, showing that 36% of actively managed stocks beat their benchmarks through June. The only category to beat indexes, according to the article, is managers of intermediate-term bond funds. Of course, that was before the latest market rout. Go here to read more and see below for articles and blog posts you might have missed.

Keep Rising Nobel laureate Robert Shiller said the market could go a lot higher before it falls and that it's a risky market right now, according to a recent Bloomberg interview. Share valuations may be among the most extreme in history, but they are still below the levels seen during the tech boom in the late 1990s. Read more

Measuring Intangibles The lofty prices of certain stocks (i.e. FAANG) present a challenge for value investors, according to the CFA Institute. It has a proprietary metric called the Franchise Quality Score intended to evaluate the benefits intangibles can offer.

Read more

Property Quants Institutional investors are using computer algorithms to buy large numbers of rental properties, according to The Wall Street Journal. Scientist Martin Kay created Entera Technology to be like a dating app, matching clients with possible properties by screening for quantifiable characteristics. Read more

Emerging Strategy Goldman Sachs Asset Management is betting on the worst-performing emerging markets by buying up Turkish and Argentinian government debt, Bloomberg reports. Goldman shares the view of other fund managers that cheap prices and solid economic fundamentals outweigh the risks of higher U.S. rates and trade wars. Read more

Missed Call Ken Fisher wrote in a recent column for USA Today that market downturns are hard to avoid, and even the best investors who try are right about one-third of the time. Avoiding trying to time the market is key to long-term success. Read more

Correlation Matters Nir Kaissar wrote in a recent Bloomberg column that the occasional correlation of investment styles or factors, such as value and momentum, isn't a good predictor of a downturn. Such a correlation did increase during the approach to the financial crisis as well as some other corrections since 1997 but declined before the dot-com crash and a few other corrections. Read more

Active Pressure Active managers can't be just good, they have to be outstanding, according to Morningstar, citing a recent paper by Vanguard. The active management industry has become crowded (as evidenced by a steady increase in candidates registered for CFA exams). And contrary to conventional wisdom, passive investing hasn't taken over. A 2017 BlackRock report found that just over 28% of the U.S. stock market is held in publicly registered funds. Read more

Good Volatility Mohnish Pabrai told the Economic Times he's "thrilled" with the recent uptick in market volatility. Even though currently there are few "cheap" stocks, Pabrai said, "you will find things being widely mispriced." He cited the example of real estate holdings in Mumbai which became attractive to him about 18 months ago. Read more

Reporting Dilemma An article in Bloomberg looked at the potential repercussions of changing the corporate earnings reporting requirement from four times a year to two, as President Trump suggested in a Tweet. What might be good for companies might reduce transparency for the investing public. Read more

Hot List Performance Update

Since our last newsletter, the S&P 500 returned -1.0%, while the Hot List returned -3.9%. So far in 2015, the portfolio has returned -18.4% vs. 2.5% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 196.7% vs. the S&P's 173.9% gain.

News on Hot List Stocks

Credit Acceptance Corp. reported third-quarter earnings of $7.75 a share, beating the consensus by nearly a dollar and beating the $5.19 EPS in last year's third quarter.

Rising crude prices lifted third quarter earnings at Spain's oil and gas producer Repsol SA. Adjusted net income rose to 588 euros ($667 million), slightly below the 590 million euro estimate.

Schnitzer Steel, a recycler of scrap metal, said EPS was $2.06, beating the 95-cent-a-share estimate and last year's 63 cents.

Powerboat maker MCBC named Jaclyn Baumgarten, co-founder and CEO of Boatsetter, to its board of directors. The appointment will increase the size of the MCBC Holdings board to eight members, seven of whom are independent.

Universal Insurance Holdings Inc. reported third-quarter earnings of $37.4 million, or $1.04 a share.

Stay Skeptical About Sure-Thing Indicators

If the last couple of weeks didn't make this obvious, headlines can cause investors to panic. Blips in the market can attract outsized coverage, and sustained declines or sharp reversals are often described in catastrophic terms. No one really pays attention when the market goes up 400 points. But when it falls by that much or more, and over successive days, it's almost certain the nightly news will cover it.

While the headlines and the stories may be important from a news perspective, they can be hazardous for investors, who are constantly searching for the next clue that will tell them what to do. If only there were a sure-fire way to know when to sell.

Enter the binary sell indicator. It's that magic tool that offers hope. It can help investors avoid corrections and bear markets and it can tell them precisely the moment to jump back in. Investing was never easier!

The problem, of course, is it doesn't exist.

In case you were wondering, here are a few indicators commonly discussed in the markets and why they don't really deliver what they promise:

1. Valuation

It's not lost on most investors that the markets have been on a tear for the last couple of years. Yale University's Robert Shiller, a Nobel prize winner, came up with a way of measuring the market's value, called the cyclically adjusted price to earnings ratio, or CAPE. It's generally used to see if stocks are over or under valued but its utility in predicting future returns is in question.

Valuations can be very good predictors of returns over the next decade, but they are useless for predicting short-term returns. To illustrate that, just think about the bull market of the late 90s and the one we are currently in. In both cases, valuations got very high, and stayed there for a long time. Investors trying to use those valuations to time the market missed substantial gains.

2. Trends

You may have heard the term "200-day moving average" in the last week or so as pundits talked about this indicator signaling something about the market after the indexes broke below it. Trend following can be successful. It calls for selling stocks when they fall below an average and buying them back when it moves back up. The idea is to avoid major market declines. But along the way you get a lot of false signals. When the S&P 500 breaks below its 200-day moving average, it produces gains more often than it produces losses. The strategy makes up for that fact through huge loss savings in bear markets. So a series of small incorrect signals are offset by a few very large correct ones.

3. Sentiment

When sentiment gets too positive it's a bad long-term sign for the market, much like when valuations get too rich. But that doesn't mean sentiment predicts the short-term. This has been explained by Nick Maggiulli of Ritholtz Wealth Management, who looked at investors' average allocation to equities over time and developed a strategy that moved into bonds when sentiment was too positive (investors had more than 70% of their portfolios in equities) and invested in stocks when sentiment was too negative (investors had less than 50% of their portfolios in equities). He found that strategy outperformed buy and hold by a wide margin. He also found that the portfolio would have been essentially impossible to follow for most investors. The model would have moved investors into bonds in September 1996, avoiding the dotcom bubble, but also missing years of gains. It wouldn't have moved back into stocks until October 2002, already well into the market's recovery. Maggiulli also notes that this indicator can stay negative for a long time before the market moves in a significant negative direction.

4. Yield curve

This one has been talked about relentlessly this year as the sure fire signal a recession is on the way. The yield curve simply describes the difference between the rates on long and short term government bonds. Ideally, long term bonds should have higher yields than short term ones. It makes lending profitable for banks among other benefits. But occasionally the short term rate will go higher than the long-term rate, and that's what's called an inverted yield curve. When this has happened in the past, recession has followed about a year to two years later.

But it's important to note it's a very different time now than in the past. The Federal Reserve is moving rates to normalized levels after a decade of being near zero to help the financial system lift itself out of the crisis. The yield curve might not have the relevance it once had as a recession prediction tool. A BMO study found that the stock market tends to do better than average when the yield curve is flattening. And even if the yield curve does invert, it doesn't give you much information about if and when the market will decline.

The stock market is going to have a significant decline at some point. We could be at the start of it now or it could still be years in the future. It is tempting to try to time when that decline will come, and simple indicators are often used to do it. Investing is far from simple, though, and short-term market timing is not a winning strategy. Some of the biggest mistakes investors make occur in trying to predict when the market will fall. Accepting that isn't possible may be one of the best things you can do for your portfolio.


Portfolio Holdings
Ticker Date Added Return
THO 10/19/2018 -2.6%
CACC 3/9/2018 24.9%
AVAV 9/21/2018 -12.8%
ULTA 9/21/2018 -2.8%
UNH 10/19/2018 -1.6%
REPYY 10/19/2018 -3.6%
UVE 8/24/2018 -8.1%
ADS 10/19/2018 -4.0%
SCHN 6/29/2018 -19.3%
MCFT 9/21/2018 -17.4%


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   |   CACC   |   AVAV   |   ULTA   |   UNH   |   REPYY   |   UVE   |   ADS   |   SCHN   |   MCFT   |  

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 $3,856 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 3.29, 3.79, 4.91, 7.09 and 8.63, 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 0.46, 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 13. 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.

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 18.3% 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 $35.81 and divide it by the current market price of $424.12. An investor, purchasing CACC, could expect to receive a 8.44% initial rate of return. Furthermore, he or she could expect the rate to increase 18.3% 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 3.25%. Compare this with CACC's initial yield of 8.44%, which will expand at an annual rate of 18.3%, 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 $101.71. 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 $1,520.04 in ten years. If it can still earn 31.1% on equity in ten years, then expected EPS will be $472.03.


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

Now take the expected future EPS of $472.03 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 11.8 and you get CACC's projected future stock price of $5,588.88.


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 $5,588.88. These numbers indicate that one could expect to make a 29.4% 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 18.3%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $192.24. 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 11.8. This equals the future stock price of $2,276.16. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $2,276.16.


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 $424.12 and the future expected stock price, including the dividend pool, of $2,276.16. If you were to invest in CACC at this time, you could expect a 18.30% 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 18.3% and 29.4%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 23.9% on CACC stock for the next ten years, based on the current fundamentals. Buffett would consider this an exceptional return, thus passing the criterion.

AEROVIRONMENT, INC.

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

AeroVironment, Inc. designs, develops, produces, supports and operates a portfolio of products and services for government agencies, businesses and consumers. The Company operates through the Unmanned Aircraft Systems (UAS) segment, which focuses primarily on the design, development, production, support and operation of UAS and tactical missile systems that provide situational awareness, multi-band communications, force protection and other mission effects. The Company supplies UAS, tactical missile systems and related services primarily to organizations within the United States Department of Defense (DoD). The Company's small UAS products include Raven, Wasp AE, Puma AE and Shrike. The Company also offers the Qube, an UAS for law enforcement, search and rescue and fire department personnel.


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. AVAV's profit margin of 17.17% passes this test.


RELATIVE STRENGTH: PASS

The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. AVAV, with a relative strength of 93, satisfies this test.


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

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for AVAV (-547.37% for EPS, and 127.12% for Sales) are not good enough to pass.


INSIDER HOLDINGS: PASS

AVAV's insiders should own at least 10% (they own 10.61% ) 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. AVAV's free cash flow of $2.50 per share passes this test.


PROFIT MARGIN CONSISTENCY: PASS

AVAV's profit margin has been consistent or even increasing over the past three years (Current year: 7.40%, Last year: 5.45%, Two years ago: 3.84%), 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 AVAV's case.


CASH AND CASH EQUIVALENTS: PASS

AVAV's level of cash $257.2 million passes this criteria. If a company is a cash generator, like AVAV, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.


INVENTORY TO SALES: PASS

This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for AVAV was 26.24% last year, while for this year it is 13.81%. Since the inventory to sales is decreasing by -12.44% the stock passes this criterion.


ACCOUNT RECEIVABLE TO SALES: PASS

This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for AVAV was 38.65% last year, while for this year it is 27.18%. Since the AR to sales is decreasing by -11.46% the stock passes this criterion.


LONG TERM DEBT/EQUITY RATIO: PASS

AVAV's trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don't need to borrow money in order to grow.


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

The "Fool Ratio" is an extremely important aspect of this analysis. The methodology says consider holding the shares when the company's Fool Ratio is greater than 0.65 (AVAV's is 0.93), but initial purchases in this range are unfavorable.

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

AVERAGE SHARES OUTSTANDING: PASS

AVAV has not been significantly increasing the number of shares outstanding within recent years which is a good sign. AVAV currently has 24.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.


SALES: 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. AVAV's sales of $305.3 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". AVAV passes the sales test.


DAILY DOLLAR VOLUME: FAIL

AVAV does not pass the Daily Dollar Volume (DDV of $35.0 million) test. It exceeds the maximum requirement of $25 million. Stocks that fail the test are too liquid for a small individual investor and many institutions have already discovered it.


PRICE: PASS

This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. AVAV with a price of $93.39 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: FAIL

AVAV's income tax paid expressed as a percentage of pretax income either this year (20.05%) or last year (19.84%) is below 20% which is cause for concern. Because the tax rate is below 20% this could mean that the earnings that were reported are unrealistically inflated due to the lower level of income tax paid. However, we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%).

ULTA BEAUTY INC

Strategy: Growth Investor
Based on: Martin Zweig

Ulta Beauty, Inc. is a holding company for the Ulta Beauty group of companies. The Company is a beauty retailer. The Company offers cosmetics, fragrance, skin, hair care products and salon services. The Company offers approximately 20,000 products from over 500 beauty brands across all categories, including the Company's own private label. The Company also offers a full-service salon in every store featuring hair, skin and brow services. The Company operates approximately 970 retail stores across over 48 states and the District of Columbia and also distributes its products through its Website, which includes a collection of tips, tutorials and social content. The Company offers makeup products, such as foundation, face powder, concealer, color correcting, face primer, blush, bronzer, contouring, highlighter, setting spray, shampoos, conditioners, hair styling products, hair styling tools and perfumes. The Company also offers makeup brushes and tools, and makeup bags and cases.


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. ULTA's P/E is 25.10, based on trailing 12 month earnings, while the current market PE is 25.00. 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. ULTA's revenue growth is 21.70%, while it's earnings growth rate is 31.57%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, ULTA 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 (15.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (17.4%) of the current year. Sales growth for the prior must be greater than the latter. For ULTA 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. ULTA's EPS ($2.46) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. ULTA's EPS for this quarter last year ($1.83) 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. ULTA's growth rate of 34.43% 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 ULTA is 15.78%. This should be less than the growth rates for the 3 previous quarters, which are 21.43%, 79.46%, and 31.71%. ULTA 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, 47.98%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 34.43%, (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 ULTA is 34.4%, 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, 34.43% must be greater than or equal to the historical growth which is 31.57%. ULTA 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. ULTA, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 3.15, 3.98, 4.98, 6.52 and 9.58, passes this test.


LONG-TERM EPS GROWTH: PASS

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. ULTA's long-term growth rate of 31.57%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.


TOTAL DEBT/EQUITY RATIO: PASS

A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. ULTA's Debt/Equity (0.00%) is not considered high relative to its industry (114.56%) 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 ULTA, this criterion has not been met (insider sell transactions are 137, while insiders buying number 88). 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.

UNITEDHEALTH GROUP INC

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

UnitedHealth Group Incorporated is a health and well-being company. The Company operates through four segments: UnitedHealthcare, OptumHealth, OptumInsight and OptumRx. It conducts its operations through two business platforms: health benefits operating under UnitedHealthcare and health services operating under Optum. UnitedHealthcare provides healthcare benefits to an array of customers and markets, and includes UnitedHealthcare Employer & Individual, UnitedHealthcare Medicare & Retirement, UnitedHealthcare Community & State, and UnitedHealthcare Global businesses. Optum is a health services business serving the healthcare marketplace, including payers, care providers, employers, governments, life sciences companies and consumers, through its OptumHealth, OptumInsight and OptumRx businesses. OptumInsight provides services, technology and healthcare solutions to participants in the healthcare industry. OptumRx provides retail network contracting, purchasing and clinical solutions.


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. UNH, with a market cap of $251,138 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. UNH, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 5.50, 5.70, 6.01, 7.25 and 9.50, 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. UNH's Price/Sales ratio of 1.14, 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. UNH, whose relative strength is 79, is in the top 50 and would pass this last criterion.

REPSOL SA (ADR)

Strategy: Contrarian Investor
Based on: David Dreman

Repsol, S.A. (Repsol) is an integrated energy company. The Company's segments include Upstream, Downstream, and Corporation and others. The Upstream segment carries out oil and natural gas exploration and production activities, and manages its project portfolio. The Downstream segment includes covers the supply and trading of crude oil and other products; oil refining and marketing of oil products, and the production and marketing of chemicals. It owns and operates five refineries in Spain (Cartagena, A Coruna, Bilbao, Puertollano and Tarragona) with a combined distillation capacity of approximately 900 thousand barrels of oil per day. The Company operates La Pampilla refinery in Peru, which has an installed capacity of approximately 120 thousand barrels of oil per day. Its Chemicals division produces and commercializes a range of products, and its activities range from basic petrochemicals to derivatives.

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. REPYY has a market cap of $28,090 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. REPYY's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.42, 0.44 have been increasing, and therefore the company passes this test.


EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: FAIL

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. REPYY fails this test as its EPS growth rate for the past 6 months (12.82%) does not beat that of the S&P (17.64%).


This methodology would utilize four separate criteria to determine if REPYY is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest".


P/E RATIO: FAIL

The P/E of a company should be in the bottom 20% of the overall market. REPYY's P/E of 10.91, based on trailing 12 month earnings, is higher than the bottom 20% criterion (below 10.75), and therefore fails this test.


PRICE/CASH FLOW (P/CF) RATIO: PASS

The P/CF of a company should be in the bottom 20% of the overall market. REPYY's P/CF of 5.66 meets the bottom 20% criterion (below 6.33) and therefore passes this test.


PRICE/BOOK (P/B) VALUE: PASS

The P/B value of a company should be in the bottom 20% of the overall market. REPYY's P/B is currently 0.78, which meets the bottom 20% criterion (below 1.01), and it therefore passes this test.


PRICE/DIVIDEND (P/D) RATIO: PASS

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%). REPYY's P/D of 17.27 meets the bottom 20% criterion (below 18.87), and it therefore passes this test.


This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below.


CURRENT RATIO: PASS

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.19] or greater than 2). This is one identifier of financially strong companies, according to this methodology. REPYY's current ratio of 1.55 passes the test.


PAYOUT RATIO: FAIL

A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for REPYY is 60.50%, while its historical payout ratio has been 29.37%. Therefore, it fails the payout criterion.


RETURN ON EQUITY: FAIL

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 largest cap stocks, which is 18.38%, and would consider anything over 27% to be staggering. The ROE for REPYY of 7.44% is not 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. REPYY's pre-tax profit margin is 9.15%, thus passing this criterion.


YIELD: PASS

The company in question should have a yield that is high and that can be maintained or increased. REPYY's current yield is 5.79%, while the market yield is 2.53%. REPYY passes this test.


LOOK AT THE TOTAL DEBT/EQUITY: PASS

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 52.55%. REPYY's Total Debt/Equity of 35.72% is considered acceptable.

UNIVERSAL INSURANCE HOLDINGS, INC.

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

Universal Insurance Holdings, Inc. (UVE) is a private personal residential homeowners insurance company in Florida. The Company performs substantially all aspects of insurance underwriting, policy issuance, general administration, and claims processing and settlement internally. The Company's subsidiaries include Universal Property & Casualty Insurance Company (UPCIC) and American Platinum Property and Casualty Insurance Company (APPCIC). UPCIC writes homeowners insurance policies in states, including Alabama, Delaware, Florida, Georgia, Hawaii, Indiana, Maryland, Massachusetts, Michigan, Minnesota, North Carolina, Pennsylvania, South Carolina and Virginia. APPCIC writes homeowners and commercial residential insurance policies in Florida. The Company has developed a suite of applications that provide underwriting, policy and claim administration services, including billing, policy maintenance, inspections, refunds, commissions and data analysis.


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. UVE's profit margin of 20.50% passes this test.


RELATIVE STRENGTH: PASS

The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. UVE, with a relative strength of 92, satisfies this test.


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

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for UVE (271.43% for EPS, and 8.37% for Sales) are not good enough to pass.


INSIDER HOLDINGS: FAIL

UVE's insiders should own at least 10% (they own 8.58%) of the company's outstanding shares. This does not satisfy the minimum requirement, and companies that do not pass this criteria are less attractive.


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. UVE's free cash flow of $2.38 per share passes this test.


PROFIT MARGIN CONSISTENCY: FAIL

The profit margin in the past must be consistently increasing. The profit margin of UVE has been inconsistent in the past three years (Current year: 14.22%, Last year: 14.51%, Two years ago: 19.48%), which is unacceptable. This inconsistency will carryover directly to the company's bottom line, or earnings per share.


R&D AS A PERCENTAGE OF SALES: 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 UVE's case.


CASH AND CASH EQUIVALENTS: PASS

UVE's level of cash $213.5 million passes this criteria. If a company is a cash generator, like UVE, 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 has attractive fundamentals and its Fool Ratio is 0.5 or less (UVE's is 0.40), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. UVE passes this test.

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

AVERAGE SHARES OUTSTANDING: PASS

UVE has not been significantly increasing the number of shares outstanding within recent years which is a good sign. UVE currently has 36.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.


SALES: FAIL

Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. UVE's sales of $808.8 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years.


DAILY DOLLAR VOLUME: PASS

UVE passes the Daily Dollar Volume (DDV of $11.1 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. UVE with a price of $41.72 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

UVE's income tax paid expressed as a percentage of pretax income this year was (33.82%) and last year (38.97%) 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.

ALLIANCE DATA SYSTEMS CORPORATION

Strategy: Contrarian Investor
Based on: David Dreman

Alliance Data Systems Corporation is a provider of data-driven marketing and loyalty solutions serving consumer-based businesses in a range of industries. The Company offers a portfolio of integrated outsourced marketing solutions, including customer loyalty programs, database marketing services, end-to-end marketing services, analytics and creative services, direct marketing services, and private label and co-brand retail credit card programs. The Company operates through three segments: LoyaltyOne, which provides coalition and short-term loyalty programs through the Company's Canadian AIR MILES Reward Program and BrandLoyalty Group B.V. (BrandLoyalty); Epsilon, which provides end-to-end, integrated direct marketing solutions, and Card Services, which provides risk management solutions, account origination, funding, transaction processing, customer care, collections and marketing services for the Company's private label and co-brand retail credit card programs.

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. ADS has a market cap of $11,402 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. ADS's EPS for the past 2 quarters, (from earliest to most recent quarter) 3.93, 5.39 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. ADS passes this test as its EPS growth rate over the past 6 months (83.33%) has beaten that of the S&P (17.64%). ADS's estimated EPS growth for the current year is (75.21%), which indicates the company is expected to experience positive earnings growth. As a result, ADS passes this test.


This methodology would utilize four separate criteria to determine if ADS is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest".


P/E RATIO: FAIL

The P/E of a company should be in the bottom 20% of the overall market. ADS's P/E of 12.99, based on trailing 12 month earnings, is higher than the bottom 20% criterion (below 10.75), and therefore fails this test.


PRICE/CASH FLOW (P/CF) RATIO: FAIL

The P/CF of a company should be in the bottom 20% of the overall market. ADS's P/CF of 8.30 does not meet the bottom 20% criterion (below 6.33), 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. ADS's P/B is currently 4.98, which does not meet the bottom 20% criterion (below 1.01), 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%). ADS's P/D of 90.91 does not meet the bottom 20% criterion (below 18.87), 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 ADS is 10.40%, while its historical payout ratio has been 10.87%. Therefore, it passes the payout criterion.


RETURN ON EQUITY: PASS

The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 18.38%, and would consider anything over 27% to be staggering. The ROE for ADS of 45.54% 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. ADS's pre-tax profit margin is 14.44%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. ADS's current yield is 1.10%, while the market yield is 2.53%. ADS fails this test.

SCHNITZER STEEL INDUSTRIES, INC.

Strategy: Value Investor
Based on: Benjamin Graham

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.


SECTOR: PASS

SCHN 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. SCHN's sales of $2,364.7 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: FAIL

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. SCHN's current ratio of 1.76 fails the test.


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

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for SCHN is $106.2 million, while the net current assets are $193.7 million. SCHN 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 SCHN 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. SCHN's P/E of 6.54 (using the current PE) passes this test.


PRICE/BOOK RATIO: PASS

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. SCHN's Price/Book ratio is 1.09, while the P/E is 6.54. SCHN passes the Price/Book test.

MCBC HOLDINGS INC

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

MCBC Holdings, Inc. (MCBC) is a holding company. The Company is a designer and manufacturer of inboard tournament ski boats and V-drive runabouts under the MasterCraft brand. The Company operates through two segments: MasterCraft and Hydra-Sports. The MasterCraft product brand consists of recreational performance boats primarily used for water skiing, wakeboarding and wake surfing, and general recreational boating. The Company distributes the MasterCraft product brand through its dealer network. The Company manufactures a range of Hydra-Sports recreational fishing boats. It also leases a parts warehouse in the United Kingdom to expedite service, primarily to dealers and customers in the European Union. Its MasterCraft-branded portfolio includes Star Series, XSeries and NXT boats. In addition, MCBC offers various accessories, including trailers and aftermarket parts. The Company operates primarily through its subsidiaries, MasterCraft Boat Company, LLC and MCBC Hydra Boats, LLC.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (14.63) relative to the growth rate (47.61%), 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 MCFT (0.31) is very favorable.


SALES AND P/E RATIO: NEUTRAL

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. MCFT, whose sales are $332.7 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 MCFT was 5.11% last year, while for this year it is 6.15%. 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 (1.04%) 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 MCFT is 47.6%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate.


TOTAL DEBT/EQUITY RATIO: FAIL

MCFT's Debt/Equity (143.09%) is above 80% and is considered very weak. Therefore, MCFT fails this test.


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 MCFT (7.74%) 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 MCFT (-10.74%) 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
RFP RESOLUTE FOREST PRODUCTS INC 82%
ESRX EXPRESS SCRIPTS HOLDING CO 72%
MMS MAXIMUS, INC. 70%
WMS ADVANCED DRAINAGE SYSTEMS INC 60%
TJX TJX COMPANIES INC 55%
MGA MAGNA INTERNATIONAL INC. (USA) 54%
CDW CDW CORP 52%
ORBK ORBOTECH LTD 51%
IRBT IROBOT CORPORATION 46%
IBM INTERNATIONAL BUSINESS MACHINES CORP. 45%



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