Validea Hot List - August 14, 2015

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Executive Summary	August 14, 2015

The Economy

While investors have been worrying about China's currency devaluation, things at home continue to look good, with a solid jobs report and stellar service sector growth highlighting a nice fortnight of data for the US.

The economy added 215,000 jobs during July, the Labor Department said, with the unemployment rate holding at 5.3%, equaling the lowest it has been since April 2008. The jobs-added figures for June and May were also revised higher by a total of 14,000. The broader "U-6" unemployment rate (which unlike the headline number takes into account those working part-time who want full-time work, and discouraged workers who have given up looking for a job) fell to 10.4%, the lowest it has been since June 2008.

Average hourly wages rose at a 2.4% annualized rate vs. June, and average weekly wages jumped at a 6% annualized pace, as hours worked per week also edged higher.

Good news came from the service sector, which expanded in July for the 66th straight month, according to the Institute for Supply Management, doing so at the fastest pace since ISM started tracking an overall service sector index in 2008. New orders also jumped, hitting a 10-year high. Employment conditions improved markedly in the sector, with the employment sub-index also making a 10-year high.

The manufacturing sector, meanwhile, expanded for the 31st straight month, according to ISM, doing so at a slightly slower pace vs. June. New orders growth ticked higher and is at a very healthy level, while employment conditions improved but not as much as they did in June.

Personal income jumped 0.4% in June, according to the Commerce Department.. Real disposable personal income rose 0.2%, while real personal consumption expenditures were flat. That meant the personal savings rate moved slightly higher to 4.8%, from 4.6%.

Elsewhere, retail and food service sales jumped 0.6% in July, according to a new report from the Census Bureau. Compared to the year-ago period, they were up 2.9%, one of the better year-over-year gains we've seen in recent months.

Gas prices are falling again. A gallon of regular unleaded on average cost $2.59 as of August 12, down from $2.77 a month earlier, according to AAA. That's about 25% below where it was a year ago.

Since our last newsletter, the S&P 500 returned -1.2%, while the Hot List returned -7.8%. So far in 2015, the portfolio has returned -1.2% vs. 1.2% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 219.7% vs. the S&P's 108.3% gain.

Portfolio Update

There's no getting around it: It has been a horrible fortnight for the Hot List. Through August 12, the portfolio had lost more than 7 percent since our last newsletter, the wide lead that it has enjoyed over the broader market just about all year evaporating.

Two big losers drove the declines. The first was Lumber Liquidators (LL), the much-maligned flooring company whose shares tumbled earlier this year amid allegations that the firm used wood products that had excessive levels of potentially dangerous chemicals in them. My models indicated that Lumber Liquidators shares had been hit too hard amid the scandal and snatched the stock up as a beaten-down value play in June. But last week, the firm reported that it lost $20.3 million, or 75 cents per share, in the second quarter, falling well short of the per-share profit of 7 cents that analysts expected, according to a poll by Zacks Investment Research. Revenue was down 5.8% from a year earlier and also short of the $256.9 million that Wall Street was looking for, according to the Associated Press, which added that the firm said it was unable to give a full-year outlook. Shares plunged 34% in the two days following the announcement.

The other big loser was Heritage Insurance Holdings Inc. (HRTG), which fell 25% in the three days following its latest quarterly report. Heritage reported second-quarter profit of $25.4 million, a 166% increase over the year-ago quarter, beating analysts' estimates. Total revenue more than doubled. But a couple factors may have spooked investors. One is that Heritage filed documents with the Securities and Exchange Commission stating that it plans to sell "from time to time" up to $400 million of various types of debt and equity securities, including common stock, preferred stock, debt, warrants and units. Investors don't like it when a company needs to raise external cash, so the possibility of Heritage issuing new shares may be worrying them, even though Heritage's CEO said the company has "no immediate plans of issuing any equity securities pursuant to the shelf registration in the near future. Shelf registration filings are common for public companies following the first anniversary of their IPO." The Insurance Insider also said investors seem to be reacting to Heritage's more cautious growth outlook.

When you're running a concentrated, quantitative portfolio, you are unfortunately going to get occasional big losers like these. Over the long term, as the gurus have shown, snatching up shares of beaten-down value picks with solid fundamentals like Lumber Liquidators is a winning strategy. In this case, the firm's disappointing quarter and the extreme negative sentiment around the stock have combined to cause trouble.

Investing is about the long-term however, so we'll continue to stick to our knitting, and I expect the Hot List to bounce back strong over the long haul. Lumber Liquidators and Heritage have both started to rebound from their respective declines -- we'll check back in our next newsletter and see whether they are continuing to make up ground.

Editor-in-Chief: John Reese

Since Inception
Hot List	219.7%
S&P 500	108.3%
Accuracy	54.5%
Beta	1.2

YTD
Hot List	-1.2%
S&P 500	1.2%

Since Last Issue
Hot List	-7.8%
S&P 500	-1.2%

Avg. Fundamentals
Market Cap (mil)	$69,295
PE Ratio	18.8
5 Yr EPS Growth	29.2%
Yield	0.9%
Rel. Strength	66

Portfolio Sectors
Financial	4
Services	3
Technology	1
Capital Goods	1
Consumer/Non-Cyclical	1

Guru Spotlight: John Neff

In the middle of 1999, most investors were snatching up shares of high-priced, flashy tech companies as the decade-old bull market soared higher and higher. Not John Neff. In June of that year, Neff, who in his three-plus decades overseeing the Windsor fund compiled one of the greatest track records ever, was writing this in his book John Neff On Investing:

Taken from John Neff on Investing (John Wiley & Sons, 1999)

Nine months later, the tech bubble had burst and the bull was over. Neff was right, and all those investors who had piled into pricey technology stocks saw their portfolios get hammered.

In his sage prediction, Neff demonstrated two qualities shared by just about every great investor that I have studied: a willingness to go against the crowd, and the belief that fundamentals are the key to good investing. Such beliefs can be very difficult to put into practice during times like the Internet bubble. It will seem like the whole world is against you, and that you are missing out and going to be forever left behind other investors. But over the long term, buying flashy, high-priced stocks of poor companies just doesn't work, no matter how much short-term success such stocks may have.

Those who have the courage and discipline to go against the crowd end up being far better off. While Neff stopped managing money in the mid-1990s, it's a good bet that his value strategy -- which looks for firms with moderate earnings and revenue growth that trade at between 40% and 60% of the broader market P/E ratio -- would've fared quite well amid the tech crash. Using such a strategy, it is unlikely that he would have held many, if any, tech stocks leading up to the crash. At the time, many hot tech plays were all hype and no substance -- the type of picks that a fundamental-focused investor like Neff wouldn't touch. Other value-focused managers who avoided overpriced tech plays, like David Dreman, Warren Buffett, and Joel Greenblatt, did, in fact, produce exceptional returns while most investors were watching their flashy tech stocks get pummeled.

Whatever the specifics of the strategy that you use to invest in stocks, you should be a lot better off if you exercise the type of independent thinking and fundamental-focused mentality that Neff demonstrated while the tech bubble was inflating and popping.

News about Validea Hot List Stocks

AmTrust Financial Services (AFSI): AmTrust reported second-quarter earnings of $79.4 million, or 84 cents per share. Adjusted for non-recurring costs and amortization costs, earnings were $1.55 per share, up 16% from the year-ago period and beating the average estimate of four analysts surveyed by Zacks Investment Research of $1.34 per share. The insurer posted revenue of $1.1 billion, up 10% from a year ago.

AmTrust also approved a 20% increase to its quarterly dividend, and announced that it has entered into an agreement to acquire Amsterdam based, N.V, Nationale Borg-Maatschappij and its affiliates from Egeria and HAL Investments for 154 million euro, an amount which is subject to adjustment based upon Nationale Borg's tangible book value at time of closing. Nationale Borg is a 120 year old international direct writer and reinsurer of surety and trade credit insurance in over 70 countries. Pending regulatory approval, the parties anticipate closing will occur by year-end 2015.

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.


Current Portfolio

Ticker	Company Name	Industry	Guru Score
GTLS	CHART INDUSTRIES, INC.	Misc. Capital Goods	79
JLL	JONES LANG LASALLE INC	Real Estate Operations	79
SAFM	SANDERSON FARMS, INC.	Food Processing	72
FL	FOOT LOCKER, INC.	Retail (Apparel)	72
AAPL	APPLE INC.	Communications Equipment	62
AFSI	AMTRUST FINANCIAL SERVICES INC	Insurance (Prop. & Casualty)	40
SC	SANTANDER CONSUMER USA HOLDINGS INC	Consumer Financial Services	36
EGBN	EAGLE BANCORP, INC.	Regional Banks	34
HRTG	HERITAGE INSURANCE HOLDINGS INC	Insurance (Prop. & Casualty)	30
LL	LUMBER LIQUIDATORS HOLDINGS INC	Retail (Home Improvement)	12

Ticker	Market Cap	Date Added	Start Price	Current Price	Return
GTLS	$758	3/13/2015	$33.50	$24.81	-25.9%
JLL	$7,898	7/31/2015	$178.04	$175.66	-1.3%
SAFM	$1,649	1/16/2015	$80.96	$73.59	-9.1%
FL	$10,122	7/31/2015	$70.55	$72.66	3.0%
AAPL	$656,668	7/31/2015	$121.30	$115.15	-5.1%
AFSI	$5,193	5/8/2015	$58.12	$62.82	8.1%
SC	$8,272	7/2/2015	$26.20	$23.12	-11.8%
EGBN	$1,466	7/31/2015	$44.40	$43.90	-1.1%
HRTG	$576	6/5/2015	$22.00	$19.19	-12.8%
LL	$352	6/5/2015	$21.37	$13.01	-39.1%


Detailed Stock 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

CHART INDUSTRIES, INC.

Profile

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

Chart Industries, Inc. (Chart) is a diversified manufacturer of engineered equipment engineered equipment for the industrial gas, energy, and biomedical industries. The Company's equipment and engineered systems are used for low-temperature and cryogenic applications. It operates through three segments: Energy & Chemicals (E&C), Distribution & Storage (D&S) and BioMedical. Its products include vacuum insulated containment vessels, heat exchangers, cold boxes and other cryogenic components. Its E&C and D&S segments manufacture products used in energy-related and industrial applications, such as the separation, liquefaction, distribution and storage of hydrocarbon and industrial gases. Through its BioMedical segment, it supplies cryogenic and other equipment used in the medical, biological research and animal breeding industries. The Company, through Thermax, Inc., provides cryogenic fluid vaporizers utilized in industrial gas, petro-chemical and liquefied natural gas applications.

Analysis

Guru Score: 93%

DETERMINE THE CLASSIFICATION:

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

P/E/GROWTH RATIO: [PASS]

The investor should examine the P/E (10.55) relative to the growth rate (22.31%), 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 GTLS (0.47) is very favorable.

SALES AND P/E RATIO: [PASS]

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. GTLS, whose sales are $1,135.3 million, needs to have a P/E below 40 to pass this criterion. GTLS's P/E of (10.55) is considered acceptable.

INVENTORY TO SALES: [PASS]

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for GTLS was 18.09% last year, while for this year it is 18.08%. Since inventory to sales has not changed appreciably, GTLS passes this test.

EPS GROWTH RATE: [PASS]

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for GTLS is 22.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.

TOTAL DEBT/EQUITY RATIO: [PASS]

This methodology would consider the Debt/Equity ratio for GTLS (25.03%) to be acceptable (equity is three to ten times debt). This ratio is one quick way to determine the financial strength of the company.

FREE CASH FLOW: [NEUTRAL]

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for GTLS (7.42%) 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 GTLS (-13.79%) 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.

JONES LANG LASALLE INC

Profile

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

Jones Lang LaSalle Incorporated (JLL) is a financial and professional services firm specializing in real estate. The Company operates through four business segments. JLL provides real estate services through three business segments: the Americas, Europe, the Middle East and Africa (EMEA), and Asia Pacific. JLL's fourth business segment is LaSalle Investment Management (LaSalle). The Company provides a range of integrated property, project management and transaction services locally, regionally and globally through its Americas, EMEA and Asia Pacific operating segments. The Company manages its investment management business globally as LaSalle. The Company provides a range of real estate services to real estate owners, occupiers, investors and developers for a range of property types. The Company offers its products and services under the JLL, LaSalle Investment Management and Tetris brands.

Analysis

Guru Score: 90%

PRICE/SALES RATIO: [PASS]

The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratio between .75 and 1.5 are good values. JLL's P/S ratio of 1.39 based on trailing 12 month sales, falls within the "good values" range for non-cyclical companies and is considered attractive.

TOTAL DEBT/EQUITY RATIO: [PASS]

Less debt equals less risk according to this methodology. JLL's Debt/Equity of 25.45% is acceptable, thus passing the test.

PRICE/RESEARCH RATIO: [PASS]

This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. JLL 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 JLL At this Point
Is JLL a "Super Stock"? NO

PRICE/SALES RATIO: [FAIL]

The prospective company should have a low Price/Sales ratio. To be considered a "Super Stock", non-cyclical (non-Smokestack) companies should have Price/Sales ratios below .75. However, JLL, who has a P/S of 1.39, does not fall within the "Super Stock" range. It does fall between 0.75 and 1.5, which is considered the "good values" range for non-cyclical companies. Nonetheless, it does not pass this "Super Stock" criterion.

LONG-TERM EPS GROWTH RATE: [PASS]

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. JLL's inflation adjusted EPS growth rate of 26.07% passes the test.

FREE CASH PER SHARE: [PASS]

This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. JLL's free cash per share of 10.54 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. JLL, whose three year net profit margin averages 6.15%, passes this evaluation.

SANDERSON FARMS, INC.

Profile

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

Sanderson Farms, Inc. is a poultry processing company which is engaged in the production, processing, marketing and distribution of fresh and frozen chicken and other prepared chicken items. In addition, the Company is engaged in the processing, marketing and distribution of prepared chicken through its wholly owned subsidiary, Sanderson Farms, Inc. (Foods Division). It produces a range of processed chicken products and prepared chicken items. It sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, under the Sanderson Farms brand name to retailers, distributors, and casual dining operators in the south-eastern, south-western, north-eastern and western United States and to customers who resell frozen chicken into export markets. During the fiscal year ended October 31, 2013 (fiscal 2013), it processed 452 million chickens, or over 3.0 billion dressed pounds.

Analysis

Guru Score: 93%

DETERMINE THE CLASSIFICATION:

SAFM is considered a "True Stalwart", according to this methodology, as its earnings growth of 18.92% lies within a moderate 10%-19% range and its annual sales of $2,913 million are greater than the multi billion dollar level. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. SAFM is attractive if SAFM can hold its own during a recession.

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 SAFM was 7.67% last year, while for this year it is 6.88%. Since inventory to sales has decreased from last year by -0.80%, SAFM passes this test.

YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS]

The Yield-adjusted P/E/G ratio for SAFM (0.27), based on the average of the 4 and 5 year historical eps growth rates, is excellent.

EARNINGS PER SHARE: [PASS]

The EPS for a stalwart company must be positive. SAFM's EPS ($13.36) would satisfy this criterion.

TOTAL DEBT/EQUITY RATIO: [PASS]

This methodology would consider the Debt/Equity ratio for SAFM (1.03%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.

FREE CASH FLOW: [NEUTRAL]

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for SAFM (6.32%) 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 SAFM (10.23%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.

FOOT LOCKER, INC.

Profile

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

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.

Analysis

Guru Score: 93%

DETERMINE THE CLASSIFICATION:

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

P/E/GROWTH RATIO: [PASS]

The investor should examine the P/E (19.33) relative to the growth rate (41.33%), 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 FL (0.47) is very favorable.

SALES AND P/E RATIO: [PASS]

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. FL, whose sales are $7,199.0 million, needs to have a P/E below 40 to pass this criterion. FL's P/E of (19.33) is considered acceptable.

EPS GROWTH RATE: [PASS]

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for FL is 41.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate.

TOTAL DEBT/EQUITY RATIO: [PASS]

This methodology would consider the Debt/Equity ratio for FL (5.20%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.

FREE CASH FLOW: [NEUTRAL]

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for FL (3.72%) 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 FL (8.10%) 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.

APPLE INC.

Profile

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

Apple Inc. designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players and sells a variety of related software, services, peripherals, networking solutions and third-party digital content and applications. The Company's products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud and a variety of accessory, service and support offerings. The Company offers a range of mobile communication and media devices, personal computing products and portable digital music players, as well as a variety of related software, services, peripherals, networking solutions and third-party hardware and software products. The Company's primary products include iPhone, iPad, Mac, iPod, iTunes, Mac App Store, iCloud, Operating System Software, Application Software and Other Application Software.

Analysis

Guru Score: 93%

DETERMINE THE CLASSIFICATION:

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

P/E/GROWTH RATIO: [PASS]

The investor should examine the P/E (13.30) relative to the growth rate (28.92%), 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 AAPL (0.46) is very favorable.

SALES AND P/E RATIO: [PASS]

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. AAPL, whose sales are $224,337.0 million, needs to have a P/E below 40 to pass this criterion. AAPL's P/E of (13.30) is considered acceptable.

INVENTORY TO SALES: [PASS]

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for AAPL was 1.03% last year, while for this year it is 1.15%. 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 (0.12%) 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 AAPL is 28.9%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.

TOTAL DEBT/EQUITY RATIO: [PASS]

This methodology would consider the Debt/Equity ratio for AAPL (43.30%) to be normal (equity is approximately twice debt).

FREE CASH FLOW: [NEUTRAL]

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for AAPL (5.50%) 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 AAPL (-3.36%) 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.

AMTRUST FINANCIAL SERVICES INC

Profile

Strategy: Patient Investor
Based on: Warren Buffett

Amtrust Financial Services, Inc. is an insurance holding company. Through its wholly owned subsidiaries, the Company provides specialty property and casualty insurance focusing on workers' compensation and commercial package coverage for small business, specialty risk and extended warranty coverage, and property and casualty coverage for middle market business. The Company operates through three segments. The Small Commercial Business segment provides workers' compensation and commercial package and other property and casualty insurance products. The Specialty Risk and Extended Warranty segment provides coverage for consumer and commercial goods and custom designed coverages, such as accidental damage plans and payment protection plans. The Specialty Program segment provides workers' compensation, package products, general liability, commercial auto liability, excess and surplus lines programs and other specialty commercial property and casualty insurance.

Analysis

Guru Score: 92%

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 0.73, 0.78, 1.35, 1.24, 1.56, 1.95, 2.29, 2.34, 3.56, 5.45. Buffett would consider AFSI's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 7 years ago. The dips have totaled 8.1%. AFSI'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 13.5% 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 AFSI, over the last ten years, is 20.7%, 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 40.6%, 15.2%, 22.8%, 20.9%, 17.9%, 17.8%, 17.0%, 15.1%, 18.5%, 20.8%, and the average ROE over the last 3 years is 18.1%, 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 AFSI, over the last ten years, is 3.5%, 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 7.8%, 4.2%, 3.8%, 2.6%, 3.0%, 3.1%, 2.6%, 2.3%, 2.4%, 3.1%, 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. AFSI's free cash flow per share of $12.70 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 $18.44 and compares it to the gain in EPS over the same period of $4.72. AFSI's management has proven it can earn shareholders a 25.6% 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: [NEUTRAL]

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. AFSI's shares outstanding have not fallen in either the current year or the last 3 or 5 years and so it fails 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 AFSI quantitatively.

STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return.

CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail]

Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $5.54 and divide it by the current market price of $62.82. An investor, purchasing AFSI, could expect to receive a 8.82% initial rate of return. Furthermore, he or she could expect the rate to increase 13.5% 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 3.15%. Compare this with AFSI's initial yield of 8.82%, which will expand at an annual rate of 13.5%, 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]

AFSI currently has a book value of $24.07. It is safe to say that if AFSI can preserve its average rate of return on equity of 18.1% and continues to retain 87.05% of its earnings, it will be able to sustain an earnings growth rate of 15.8% and it will have a book value of $104.23 in ten years. If it can still earn 18.1% on equity in ten years, then expected EPS will be $18.90.

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

Now take the expected future EPS of $18.90 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (11.3) (5 year average P/E in this case), which is 9.6 and you get AFSI's projected future stock price of $180.69.

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 $15.36. This gives you a total dollar amount of $196.06. These numbers indicate that one could expect to make a 12.1% average annual return on AFSI's stock at the present time. Although, the return is slightly below the liking of Buffett, the return would still be somewhat acceptable.

CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail]

If you take the EPS growth of 13.5%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $19.65. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (11.3) (5 year average P/E in this case), which is 9.6. This equals the future stock price of $187.90. Add in the total expected dividend pool of $15.36 to get a total dollar amount of $203.26.

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 $62.82 and the future expected stock price, including the dividend pool, of $203.26. If you were to invest in AFSI at this time, you could expect a 12.46% average annual return on your money. Buffett likes to see a 15% return, but nonetheless would accept this return.

LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [PASS]

Based on the two different methods, you could expect an annual compounding rate of return somewhere between 12.1% and 12.5%. Buffett likes to see a 15% return, but nonetheless would accept this return, thus passing the criterion.

SANTANDER CONSUMER USA HOLDINGS INC

Profile

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

Santander Consumer USA Holdings Inc. is a holding company. The Company is a specialized consumer finance company focused on vehicle finance and unsecured consumer lending products. The Company offers various auto financing products and services to Chrysler customers and dealers under the Chrysler Capital brand. These products and services include consumer retail installment contracts and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. The Company also originates vehicle loans through a Web-based direct lending program, purchases vehicle retail installment contracts and services automobile and recreational and marine vehicle portfolios for other lenders. Its products and services include vehicle finance, and origination and servicing.

Analysis

Guru Score: 93%

DETERMINE THE CLASSIFICATION:

SC is considered a "True Stalwart", according to this methodology, as its earnings growth of 14.16% lies within a moderate 10%-19% range and its annual sales of $6,624 million are greater than the multi billion dollar level. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. SC is attractive if SC can hold its own during a recession.

YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS]

The Yield-adjusted P/E/G ratio for SC (0.49), based on the average of the 3, 4 and 5 year historical eps growth rates, is excellent.

EARNINGS PER SHARE: [PASS]

The EPS for a stalwart company must be positive. SC's EPS ($2.84) would satisfy this criterion.

TOTAL DEBT/EQUITY RATIO: [NEUTRAL]

SC is a financial company so debt to equity rules are not applied to determine the company's financial soundness.

EQUITY/ASSETS RATIO: [PASS]

This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. SC's Equity/Assets ratio (12.00%) is healthy and above the minimum 5% this methodology looks for, thus passing the criterion.

RETURN ON ASSETS: [PASS]

This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. SC's ROA (3.08%) is above the minimum 1% that this methodology looks for, thus passing the criterion.

FREE CASH FLOW: [NEUTRAL]

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for SC (-7.96%) 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 SC (-368.42%) 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.

EAGLE BANCORP, INC.

Profile

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

Eagle Bancorp, Inc. is a bank holding company for EagleBank (the Bank). The Bank is the Company's principal operating subsidiary. The Bank is a chartered commercial bank. The Bank operates twenty two banking offices: seven in Montgomery County, Maryland; five located in the District of Columbia, and ten in Northern Virginia. The Bank offers a range of commercial banking services to its business and professional clients, as well as consumer banking services to individuals living or working in the service area. The Bank also provides commercial banking services to sole proprietorships, small, medium and large-sized businesses, partnerships, corporations, non-profit organizations and associations, and investors. The Bank offers a range of retail banking services to accommodate the individual needs of both corporate customers as well as the community the Bank serves. The Bank also offers online banking, mobile banking and a remote deposit service.

Analysis

Guru Score: 91%

DETERMINE THE CLASSIFICATION:

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

P/E/GROWTH RATIO: [PASS]

The investor should examine the P/E (19.61) relative to the growth rate (24.78%), 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 EGBN (0.79) 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. EGBN, whose sales are $225.9 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate.

EPS GROWTH RATE: [PASS]

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for EGBN is 24.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.

TOTAL DEBT/EQUITY RATIO: [NEUTRAL]

EGBN is a financial company so debt to equity rules are not applied to determine the company's financial soundness.

EQUITY/ASSETS RATIO: [PASS]

This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. EGBN's Equity/Assets ratio (13.00%) is healthy and above the minimum 5% this methodology looks for, thus passing the criterion.

RETURN ON ASSETS: [PASS]

This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. EGBN's ROA (1.43%) is above the minimum 1% that this methodology looks for, thus passing the criterion.

FREE CASH FLOW: [NEUTRAL]

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for EGBN (4.44%) 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 EGBN (-4.48%) 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.

HERITAGE INSURANCE HOLDINGS INC

Profile

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

Heritage Insurance Holdings, Inc. (Heritage Insurance), formerly Heritage Insurance Holdings, LLC, is a property and casualty insurance holding company. The Company is engaged in providing personal and commercial residential insurance. Through Its subsidiary, Heritage Property & Casualty Insurance Company (Heritage P&C), it provides personal residential insurance for single-family homeowners and condominium owners, rental property insurance and commercial residential insurance in the state of Florida. The Company is vertically integrated and control or manage all aspects of insurance underwriting, actuRoboto analysis, distribution and claims processing, and adjusting. It has approximately 207,000 personal residential policies in force and approximately 2,400 commercial residential policies in force.

Analysis

Guru Score: 78%

DETERMINE THE CLASSIFICATION:

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

P/E/GROWTH RATIO: [PASS]

The investor should examine the P/E (6.79) relative to the growth rate (51.34%), 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 HRTG (0.13) 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. HRTG, whose sales are $347.6 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate.

EPS GROWTH RATE: [FAIL]

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for HRTG is 51.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered too fast.

TOTAL DEBT/EQUITY RATIO: [NEUTRAL]

HRTG is a financial company so debt to equity rules are not applied to determine the company's financial soundness.

EQUITY/ASSETS RATIO: [PASS]

This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. HRTG's Equity/Assets ratio (37.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion.

RETURN ON ASSETS: [PASS]

This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. HRTG's ROA (12.33%) is above the minimum 1% that this methodology looks for, thus passing the criterion.

FREE CASH FLOW: [BONUS PASS]

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it 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 HRTG (37.78%) is high enough to add to the attractiveness of the stock.

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 HRTG (27.88%) 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.

LUMBER LIQUIDATORS HOLDINGS INC

Profile

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

Lumber Liquidators Holdings, Inc. (Lumber Liquidators) is a retailer of hardwood flooring, and hardwood flooring enhancements and accessories in North America. The Company's product categories include Solid and Engineered Hardwood; Laminate; Bamboo, Cork and Vinyl Plank, and Moldings and Accessories. The Company sells its products primarily to homeowners or to contractors on behalf of homeowners. The Company offers wood flooring under18 brand names, led by Bellawood, a collection of solid and engineered hardwood flooring, bamboo flooring, moldings and accessories. The Company also offers a range of flooring enhancements and installation accessories, including moldings, noise-reducing underlay and tools. It offers around 400 different flooring product stock-keeping units. As of February 23, 2015, Lumber Liquidators operated around 354 stores located in 46 states of the United States and nine store locations in Canada.

Analysis

Guru Score: 90%

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. LL's P/S of 0.34 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. LL'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. LL 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 LL At this Point
Is LL 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.LL's P/S ratio of 0.34 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: [PASS]

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. LL's inflation adjusted EPS growth rate of 24.18% passes the test.

FREE CASH PER SHARE: [FAIL]

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. LL's free cash per share of -0.51 fails 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. LL, whose three year net profit margin averages 6.53%, passes this evaluation.


Watch List

The Watch List contains the highest scoring stocks according to our guru consensus system that are not currently in the Hot List portfolio. We provide this list both for informational purposes and for investors who are not comfortable with a portfolio of ten stocks.

Ticker	Company Name	Industry	Guru Score
UVE	UNIVERSAL INSURANCE HOLDINGS, INC.	Insurance (Prop. & Casualty)	100
BOFI	BOFI HOLDING, INC.	Regional Banks	90
WETF	WISDOMTREE INVESTMENTS, INC.	Investment Services	80
GIII	G-III APPAREL GROUP, LTD.	Apparel/Accessories	66
TRV	TRAVELERS COMPANIES INC	Insurance (Prop. & Casualty)	60
VLO	VALERO ENERGY CORPORATION	Oil & Gas Operations	57
LCI	LANNETT COMPANY, INC.	Biotechnology & Drugs	56
SSL	SASOL LIMITED (ADR)	Chemical Manufacturing	55
PII	POLARIS INDUSTRIES INC.	Recreational Products	52
FOSL	FOSSIL GROUP INC	Jewelry & Silverware	49


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