The Economy

The market's performance over the past few weeks is reminiscent of a runner who slowed down a bit after a spurt of exerting lots of energy. Over the past week or so, the S&P 500 is essentially flat and the Russell 2000 is down slightly. This is following huge moves upward, particularly for small and mid-caps, since the election. As we know, the market can't go straight up forever, and pullbacks and consolidation are healthy over time. Investing in the stock market is more of a marathon, vs. a sprint, but the market's action shows that for now things might be slowing down. With that being said, December can be a good month for stocks and during shortened trading weeks and during the holidays, the bias in the market tends to be more positive historically. According to Yardeni Research, the S&P 500 has been up 72% of the time in the month of December over the last 88 years.

This is also the time of year where you will be reading or hearing about predictions for 2017, including where experts see the market at the end of next year. The chart below, taken from the Wall Street Journal, shows a sample of 2017 year-end forecasts for the S&P 500, and the bar chart on the left shows the actual returns of the market vs. the forecasts going back to 2000.



Remember that predicting the market in the short run is really a guessing game and it is almost impossible to do accurately and consistently over time, which is why investors need to take a long term, disciplined view when thinking about investing in the markets. The chart below, taken from Ben Carlson's excellent blog, offers another way to visualize how much variability there is year over year in the stock market. The long term average return is right around 10%, which is why the forecasters predict what they do, but year by year you can see massive deviation around the mean. If someone nails the market's year-end price, consider them more lucky than good. In the main section below, we do highlight our best portfolios for the year, but in the same breath we talk about their long term performance as well because it's the full track record of each strategy that is statistically significant. Take a look to see what has worked this year.



Moving on to the economy and other factors influencing the markets, the news of the week (and it's not really new because the market had discounted it in) is the Federal Reserve increase of the Fed Funds rate by 0.25%. It's important to think about increasing interest rates, which it seems are very likely coming, on multiple levels. The first thing that jumps out is how low rates are currently relative to their historical averages. The chart below says it all. Bonds have gotten clobbered, the dollar has strengthened, financials have rallied and bond surrogates in the equity market (utilities and telcos) have suffered because higher rates in the future will be an option for those who are seeking income. Many experts are still predicting a very slow and steady set of rate increases, and as the chart shows, we have a long way to go before normalizing rates, but higher rates will likely be one of the key drivers to impact the markets over the next 12-24 months.



The CPI, a measure of inflation, rose for the fourth straight month in November by 0.2%. Inflation has been mostly non-existent over the last few years, but higher energy prices and a tightening labor market and increasing wage growth could be signs that more inflation is on its way.

National Association of Home Builders housing market index rose to a level of 70, which is the highest reading since July 2005. A reading over 50 indicates builders have more confidence than less. An improvement in the housing market will be good for the overall economy. In every major recovery since World War II, housing has played an important role in driving economic growth. The potential headwind for housing is higher rates, but as the chart above shows, rates are still far below historical norms and less regulation could make banks more willing to lend, which would be a positive for housing as well.

Growth in the service sector continued to accelerate during the third quarter. Service sector revenue increased by an estimated 5.3% on a year-over-year basis, according to the Commerce Department. The growth was broad based, with 11 out of 12 sectors showing positive growth. The fact that increases came across a wide variety of sectors is generally a positive in the underlying data.

On the earnings and market valuation front, Q4 is going to tell us a lot. Profits for the S&P 500 are expected to grow 3%, according to FactSet's Earnings Insight report. If earnings grow in Q4, it will be the first time we will get year over year growth in profits for two quarters back to back since Q4 2015 - Q1 2015. The current forward P/E on the S&P 500 is 17.1. As FactSet notes, the valuation is above the 5 year average of 15 and 10 year average of a 14.4. Keep an eye on valuations here. If earnings grow, valuations are not that high, but if there profits don't deliver, the market looks about fully valued here.

Performance Update

Since our last newsletter, the S&P 500 returned 3.2%, while the Hot List returned 0.3%. So far in 2016, the portfolio has returned 10.4% vs. 10.7% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 211.2% vs. the S&P's 126.1% gain.

The Fallen

As we rebalance the Validea Hot List, 6 stocks leave our portfolio. These include: Nic Inc. (EGOV), Grupo Financiero Galicia S.a. (Adr) (GGAL), Maximus, Inc. (MMS), Tractor Supply Company (TSCO), Capella Education Company (CPLA) and Drew Industries, Inc. (DW).

The Keepers

4 stocks remain in the portfolio. They are: Sanderson Farms, Inc. (SAFM), Sturm Ruger & Company Inc (RGR), Waddell & Reed Financial, Inc. (WDR) and Banco Macro Sa (Adr) (BMA).

The New Additions

We are adding 6 stocks to the portfolio. These include: Thor Industries, Inc. (THO), Universal Forest Products, Inc. (UFPI), Trex Company Inc (TREX), Smith & Wesson Holding Corp (SWHC), Independent Bank Group Inc (IBTX) and Nk Lukoil Pao (Adr) (LUKOY).

Latest Changes

Additions  
THOR INDUSTRIES, INC. THO
UNIVERSAL FOREST PRODUCTS, INC. UFPI
TREX COMPANY INC TREX
SMITH & WESSON HOLDING CORP SWHC
INDEPENDENT BANK GROUP INC IBTX
NK LUKOIL PAO (ADR) LUKOY
Deletions  
NIC INC. EGOV
GRUPO FINANCIERO GALICIA S.A. (ADR) GGAL
MAXIMUS, INC. MMS
TRACTOR SUPPLY COMPANY TSCO
CAPELLA EDUCATION COMPANY CPLA
DREW INDUSTRIES, INC. DW

The Year in Review

This year was rife with conjecture and uncertainty as the gray-haired bull market plodded persistently forward amidst predictions of bursting bubbles and market Armageddon. Questions around the Fed's supposed plans for interest rate movement and limp GDP growth abounded along with myriad other domestic and global concerns, and the U.S. endured the drama and mud-slinging of a uniquely controversial presidential election.

As the year draws to a close, let's review the overall performance of our portfolios; those that performed strongly, showed the most improvement and/or were the most persistent performers over time. Overall, the average of all our guru-based 10 stock monthly rebalanced portfolios returned 16.3% for the year versus the average S&P 500 gain of 10.2%. All portfolios showed positive returns this year, with eleven pivoting from negative to positive returns compared to last year. The Hot List portfolio, our newsletter portfolio is up 9.9%, up from a loss in 2015. The performance data was taken as of December 14th.

Validea's Top Performing Portfolio in 2016

The top performer of 2016 was our Price/Sales Investor Portfolio, based on the strategy outlined by Ken Fisher. The P/S Investor model is based on Ken Fisher's book, Super Stocks, in which he outlined a value strategy that looked for stocks with low price-sales ratios and then narrowed prospects further based on earnings growth, profit margins, and debt levels to identify solid opportunities.

The portfolio returned an impressive 38.8% return for investors. This portfolio was accurate (meaning profitable) on over 60% of its picks, with some of the big winners including: Barrett Business Services (BBSI), a provider of business management solutions for small and mid-sized companies, which gained 30.83% since its addition on August 26th; brokerage firm Marcus & Millichap (MMI) which, since its addition on March 11th, has earned 19.32%; and John B. Sanfilippo & Son, Inc. (JBSS), a processor and distributor of peanuts and tree nuts, which earned 35.39% while it was held from August 26th until the November 18th rebalancing. Since its inception in 2003, the P/S Investor portfolio has returned 12.2% compared to 6.0% for the overall market. The model has gone through periods of relative underperformance (2005, 2011, 2014 and 2015) but in all other years since 2003, the strategy has outperformed the market by mostly wide margins.

Biggest Turnaround

The Fisher portfolio also experienced the biggest turnaround during the year, overcoming a loss of 18.1% in 2015. A few of the more significant contributors to 2015's lackluster results were Lumber Liquidators Holdings Inc. (LL), a specialty retailer of hardwood flooring, which took a 46.94% hit while it was held during the summer months of 2015. This was followed closely by Chart Industries (GTLS), a manufacturer of engineered equipment for the industrial gas, energy, and biomedical industries, which suffered a loss of 41.79% between March 13th and November 20th of 2015.

Top Performing Investment Style

Validea's value portfolios showed the most gains in 2016. After the Fisher-based strategy return of 41.3% came our David Dreman-based "Contrarian Investor" portfolio, which earned 31.4% (compared to a hefty loss of 21.3% in 2015). Leading the charge was Navient Corp. (NAVI), a loan management and asset recovery firm, which returned 45.78% during its tenure from January 15th to May 6th and then earned another 35.23% during it's one month stint from October 21st to November 18th. Other strong performers were the insurance company Unum Group (UNM), which rose 33.89% between February 12th and May 6th, and Mitsubishi Financial Group (MTU) which gained 31.39% between February 12th and September 23rd. The Contrarian Investor portfolio has averaged a 4.2% return since its inception in 2003 (versus 6.3% for the overall market) and has shown gains in nine of its fourteen years. In 2013, the portfolio earned 5.1% but lagged the market's return of 29.6%. Keep in mind that the Contrarian Investor did extremely well during the periods from 2003-2007, which was a period of increasing interest rates, value stock outperformance and international stocks outperforming domestic equities. Those conditions may be starting to exist now, which could mean a reversion in the Contrarian investor strategy. As the strategy name indicates, it's "contrarian", so there will be periods when the approach struggles vs. the broader market.

Our Benjamin Graham-inspired "Value Investor" portfolio saw a 25.4% return in 2016, starting off the year with a 62.78% windfall from the fashion accessories retailer Fossil Group (FOSL) which it held for only a short two months (January 15th to March 11th). Sasol Ltd., an international integrated chemicals and energy company, returned 36.55% during the same holding period. Contract drilling company Helmerich & Payne (HP), still part of the portfolio, has appreciated 30.95% since it was added last August. This portfolio underperformed the broader market in 2007, 2011, 2014 and 2015, but each year it outperformed it did so significantly. On average, since its inception in 2003, the Value Investor portfolio returned 10.2% against 6.0% for market.

Most Consistent Portfolio Performance

This distinction goes to our Motley Fool-inspired "Small-Cap Growth" portfolio which has shown positive returns every year since inception except 2008 and has outperformed the market in eleven of those years. The portfolio this year is up 16.2%, with a significant post-election bump triggered by investor confidence regarding Trump's promises to champion for smaller, domestic-centric businesses. This 10-stock portfolio has been one of our strongest performers over the long haul.

The bigger winners in the Small-Cap Growth portfolio include financial services company First Busey Corp. (BUSE) which has been held since the end of October and returned 33.25% (as of the November 18th rebalancing). Not far behind is Noah Holdings Ltd., a global wealth management company which, during a one-month stint between February and March, earned a healthy 31.74% for investors. Tech services company Globant (GLOB) also performed well during the same short holding period with a return of 25.29%.

Even when the Small-Cap Growth portfolio suffered a 25% loss in 2008, it fared better than the broader market's 38.5% drop in the wake of the financial crisis.

The Hot List Portfolio

Validea's flagship portfolio has had a solid year, although in the past few days the return has dropped it slightly below the market. For the year, the portfolio has returned 9.9% (making profitable trades more than half the time) after two years of losses (11.1% in 2014 and 12.9% in 2015). One of the biggest contributors was Forum Energy Technologies (FET), an oilfield products company that was held for a brief one-month period (February 12th to March 11th). Recreational vehicle manufacturer Thor Industries (THO), held from February 12th to July 29th, showed a stellar return of 54.31%, and John B. Sanfilippo & Son, Inc. (JBSS) returned 33.98% to investors after its short tenure from October 21st to November 18th. Since 2003, the Hot List portfolio has gained an average of 8.9% per year versus the market's average gain of 6.3%. In eight of the nine years that the portfolio showed positive returns, it outperformed the market by a healthy margin. The biggest loss suffered was in 2008 (35%) against the market's 38.5% decline.

The performance of our models in 2016 is a good example of the importance of staying disciplined and committed to active strategies. While 2014 and 2015 where not good years overall for our models, 2016 proved to be an above average year, particularly for our value strategies. Those who stayed the course were rewarded. While good strategies often go through poor performance periods, focusing on fundamental metrics, sticking to a solid investment strategy, and avoiding emotional knee-jerk reactions will serve investors in the long run.

Newcomers to the Validea Hot List

INDEPENDENT BANK GROUP INC (IBTX):
Independent Bank Group, Inc. is a bank holding company. Through the Company's subsidiary, Independent Bank (the Bank), it provides a range of commercial banking products and services tailored to meet the needs of businesses, professionals and individuals. It passes the tests of my strategy based on the Motley Fool and my Momentum Investor model. Full Details

NK LUKOIL PAO (ADR) (LUKOY):
NK LUKOIL PAO is an energy company. The primary activities of LUKOIL and its subsidiaries are oil exploration, production, refining, marketing and distribution. It meets the tests of my strategies based on James O'Shaughnessy and Ken Fisher. Full Details

SMITH & WESSON HOLDING CORP (SWHC):
Smith & Wesson Holding Corporation is a manufacturer of firearms and a provider of accessory products for the shooting, hunting and rugged outdoor enthusiast. It receives approval from my strategies based on Peter Lynch and Joel Greenblatt. Full Details

THOR INDUSTRIES, INC. (THO):
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. It passes the tests of my strategies based on Peter Lynch and James O'Shaughnessy. Full Details

TREX COMPANY INC(TREX):
Trex Company, Inc. is a manufacturer of wood-alternative decking and railing products. The Company markets its products under the brand name Trex. The Company offers a set of outdoor living products in the decking, railing, porch, fencing, trim, steel deck framing and outdoor lighting categories. It passes the tests of my strategies based on Martin Zweig and my Momentum Investor model. Full Details

UNIVERSAL FOREST PRODUCTS, INC. (UFPI):
Universal Forest Products, Inc. is a holding company. The Company, through its subsidiaries, supplies wood, wood composite and other products to three primary markets: retail, construction and industrial. It meets the tests of my strategies based on James O'Shaughnessy and Kenneth Fisher. Full Details

Portfolio Holdings
Ticker Date Added Return
BMA 7/1/2016 -12.8%
THO 12/16/2016 TBD
RGR 11/18/2016 -2.5%
TREX 12/16/2016 TBD
IBTX 12/16/2016 TBD
SWHC 12/16/2016 TBD
UFPI 12/16/2016 TBD
LUKOY 12/16/2016 TBD
SAFM 11/18/2016 9.5%
WDR 11/18/2016 6.1%


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

BMA   |   THO   |   RGR   |   TREX   |   IBTX   |   SWHC   |   UFPI   |   LUKOY   |   SAFM   |   WDR   |  

BANCO MACRO SA (ADR)

Strategy: Patient Investor
Based on: Warren Buffett

Banco Macro SA is an Argnetina-based financial institution (the Bank) that offers traditional bank products and services to companies, including those operating in regional economies, as well as to individuals. In addition, the Bank performs certain transactions through its subsidiaries, including mainly Banco del Tucuman, Macro Bank Ltd, Macro Securities SA, Macro Fiducia SA and Macro Fondos SGFCI SA. It has approximately two categories of customers, such as retail customers, including individuals and entrepreneurs and corporate customers, which include small, medium and large companies and major corporations. In addition, it provides services to over four provincial governments. It provides its corporate customers with traditional banking products and services, such as deposits, lending (including overdraft facilities), check cashing advances and factoring, guaranteed loans and credit lines for financing foreign trade and cash management services.

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 0.04, 0.04, 0.06, 0.11, 0.09, 0.13, 0.17, 0.26, 0.38, 0.55. Buffett would consider BMA's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 6 years ago. The dips have totaled 18.2%. BMA's long term historical EPS growth rate is 27.1%, based on the 10 year average EPS growth rate, and it is expected to grow earnings 25.7% 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 BMA, over the last ten years, is 23.9%, 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 15.8%, 13.9%, 22.9%, 28.8%, 20.2%, 24.5%, 24.4%, 27.8%, 29.7%, 30.9%, and the average ROE over the last 3 years is 29.5%, 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 BMA, over the last ten years, is 3.3%, 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 2.5%, 1.9%, 2.9%, 3.6%, 2.5%, 2.8%, 3.1%, 4.0%, 4.6%, 4.7%, 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. BMA's free cash flow per share of $4.47 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 $1.62 and compares it to the gain in EPS over the same period of $0.51. BMA's management has proven it can earn shareholders a 31.4% 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. BMA's shares outstanding have fallen over the past five years from 573,250,000 to 58,000,000, 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 BMA 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 $7.31 and divide it by the current market price of $64.56. An investor, purchasing BMA, could expect to receive a 11.32% initial rate of return. Furthermore, he or she could expect the rate to increase 25.7% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing.


COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: PASS

Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 2.25%. Compare this with BMA's initial yield of 11.32%, which will expand at an annual rate of 25.7%, 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]

BMA currently has a book value of $21.88. It is safe to say that if BMA can preserve its average rate of return on equity of 23.9% and continues to retain 84.71% of its earnings, it will be able to sustain an earnings growth rate of 20.2% and it will have a book value of $138.00 in ten years. If it can still earn 23.9% on equity in ten years, then expected EPS will be $32.94.


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

Now take the expected future EPS of $32.94 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (8.8) (5 year average P/E in this case), which is 6.3 and you get BMA's projected future stock price of $206.19.


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 $48.39. This gives you a total dollar amount of $254.58. These numbers indicate that one could expect to make a 14.7% average annual return on BMA'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 25.7%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $72.05. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (8.8) (5 year average P/E in this case), which is 6.3. This equals the future stock price of $451.01. Add in the total expected dividend pool of $48.39 to get a total dollar amount of $499.41.


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 $64.56 and the future expected stock price, including the dividend pool, of $499.41. If you were to invest in BMA at this time, you could expect a 22.70% average annual return on your money. Buffett would consider this an exceptional 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 14.7% and 22.7%. 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 18.7% on BMA stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.


THOR INDUSTRIES, INC.

Strategy: Growth Investor
Based on: Martin Zweig

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).


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. THO's P/E is 18.95, based on trailing 12 month earnings, while the current market PE is 18.00. 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. THO's revenue growth is 13.75%, while it's earnings growth rate is 22.61%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, THO fails this criterion.


SALES GROWTH RATE: PASS

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (65.8%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (22.2%) of the current year. Sales growth for the prior must be greater than the latter. For THO this criterion has been met.


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


CURRENT QUARTER EARNINGS: PASS

The first of these criteria is that the current EPS be positive. THO's EPS ($1.49) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. THO's EPS for this quarter last year ($0.97) 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. THO's growth rate of 53.61% 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 THO is 11.31%. This should be less than the growth rates for the 3 previous quarters, which are 50.88%, 26.89%, and 19.85%. THO 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, 28.34%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 53.61%, (versus the same quarter one year ago) then the stock passes.


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

The EPS growth rate for the current quarter, 53.61% must be greater than or equal to the historical growth which is 22.61%. THO 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. THO, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.07, 2.86, 3.29, 3.79 and 4.91, 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. THO's long-term growth rate of 22.61%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.


TOTAL DEBT/EQUITY RATIO: FAIL

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. THO's Debt/Equity (25.65%) is considered high relative to its industry (10.00%) and fails 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 THO, this criterion has not been met (insider sell transactions are 188, while insiders buying number 22). 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.


STURM RUGER & COMPANY INC

Strategy: Growth Investor
Based on: Martin Zweig

Sturm, Ruger & Company, Inc. and subsidiary, is engaged in the design, manufacture and sale of firearms to domestic customers. The Company operates through two segments: firearms and castings. The firearms segment manufactures and sells rifles, pistols and revolvers to a range of federally licensed, independent wholesale distributors located in the United States. The castings segment manufactures and sells steel investment castings, and metal injection molding parts. Its castings segment provides castings and MIM parts for the Company's firearms segment. In addition, the castings segment produces some products for various customers in a range of industries. It offers products in three industry product categories: rifles, pistols and revolvers. Its firearms are sold through independent wholesale distributors to the commercial sporting market. It manufactures and sells investment castings made from steel alloys and metal injection molding parts for internal use in the firearms segment.


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. RGR's P/E is 11.91, based on trailing 12 month earnings, while the current market PE is 18.00. Therefore, it passes the first test.


REVENUE GROWTH IN RELATION TO EPS GROWTH: PASS

Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. RGR's revenue growth is 11.42%, while it's earnings growth rate is 8.31%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, RGR passes this criterion.


SALES GROWTH RATE: PASS

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (33.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (19.2%) of the current year. Sales growth for the prior must be greater than the latter. For RGR this criterion has been met.


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


CURRENT QUARTER EARNINGS: PASS

The first of these criteria is that the current EPS be positive. RGR's EPS ($1.03) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. RGR's EPS for this quarter last year ($0.62) 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. RGR's growth rate of 66.13% 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 RGR is 4.16%. This should be less than the growth rates for the 3 previous quarters, which are 214.29%, 49.38%, and 34.07%. RGR 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, 248.42%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 66.13%, (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 RGR is 66.1%, 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, 66.13% must be greater than or equal to the historical growth which is 8.31%. RGR would therefore pass this test.


EARNINGS PERSISTENCE: FAIL

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. RGR, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.09, 3.60, 5.58, 1.95, and 3.21, fails this test.


LONG-TERM EPS GROWTH: FAIL

The final important criterion in this approach is that Earnings Growth be at least 15% per year. RGR's long-term growth rate of 8.31%, based on the average of the 3, 4 and 5 year historical eps growth rates, fails the minimum required.


TOTAL DEBT/EQUITY RATIO: PASS

A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. RGR's Debt/Equity (0.00%) is not considered high relative to its industry (108.82%) 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 RGR, this criterion has not been met (insider sell transactions are 103, while insiders buying number 56). 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.


TREX COMPANY INC

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

Trex Company, Inc. is a manufacturer of wood-alternative decking and railing products. The Company markets its products under the brand name Trex. The Company offers a set of outdoor living products in the decking, railing, porch, fencing, trim, steel deck framing and outdoor lighting categories. Its decking products include Trex Transcend, Trex Enhance and Trex Select. The Company's railing products include Trex Transcend Railing, Trex Select Railing and Trex Reveal aluminum railing. It offers Trex Transcend Porch Flooring and Railing System, a porch product, and a fencing product called Trex Seclusions. The Company offers TrexTrim product, which is a cellular polyvinyl chloride residential exterior trim product. It offers a triple-coated steel deck framing system called Trex Elevations. The Company offers outdoor lighting systems, including Trex DeckLighting and Trex Landscape Lighting. It also offers Trex Hideaway, which a hidden fastening system for grooved boards.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (32.38) relative to the growth rate (84.18%), based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, 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 TREX (0.38) 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. TREX, whose sales are $473.5 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 TREX was 6.06% last year, while for this year it is 5.24%. Since inventory to sales has decreased from last year by -0.82%, TREX passes this test.


EPS GROWTH RATE: FAIL

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for TREX is 84.2%, based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, which is considered too fast.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for TREX (0.00%) to be wonderfully low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for TREX (1.85%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for TREX (0.31%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


INDEPENDENT BANK GROUP INC

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

Independent Bank Group, Inc. is a bank holding company. Through the Company's subsidiary, Independent Bank (the Bank), it provides a range of commercial banking products and services tailored to meet the needs of businesses, professionals and individuals. Its commercial lending products include owner-occupied commercial real estate loans, interim construction loans, commercial loans to a mix of small and midsized businesses, and loans to professionals, particularly medical practices. Its retail lending products include residential first and second mortgage loans and consumer installment loans, such as loans to purchase cars, boats and other recreational vehicles. The Company operates approximately 40 banking offices in the Dallas-Fort Worth metropolitan area, the Austin/Central Texas area, and the Houston metropolitan area. The Company also provides wealth management services to its customers, including investment advisory and other related services.


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. IBTX's profit margin of 24.91% 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. IBTX, with a relative strength of 91, 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 IBTX (65.96% for EPS, and 22.28% for Sales) are not good enough to pass.


INSIDER HOLDINGS: PASS

IBTX's insiders should own at least 10% (they own 15.93% ) 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. IBTX's free cash flow of $1.56 per share passes this test.


PROFIT MARGIN CONSISTENCY: FAIL

The profit margin in the past must be consistently increasing. The profit margin of IBTX has been inconsistent in the past three years (Current year: 22.29%, Last year: 20.68%, Two years ago: 22.70%), 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 IBTX's case.


CASH AND CASH EQUIVALENTS: PASS

IBTX's level of cash $151.3 million passes this criteria. If a company is a cash generator, like IBTX, 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): FAIL

The "Fool Ratio" is an extremely important aspect of this analysis. The methodology says consider shorting shares when the company's Fool Ratio is greater than 1.30. IBTX's PEG Ratio of 14.71 is excessively high.

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

AVERAGE SHARES OUTSTANDING: FAIL

IBTX has either issued a significant amount of new shares over the past year or has been issuing more and more shares over the past five years. IBTX currently has 18.0 million shares outstanding. Neither of these are a good sign. Generally when a small-cap company issues more stock, the existing stock becomes devalued by the market, and hence diluted.


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. IBTX's sales of $203.6 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". IBTX passes the sales test.


DAILY DOLLAR VOLUME: PASS

IBTX passes the Daily Dollar Volume (DDV of $6.4 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf."


PRICE: PASS

This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. IBTX with a price of $62.20 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

IBTX's income tax paid expressed as a percentage of pretax income this year was (32.89%) and last year (33.99%) 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.


SMITH & WESSON HOLDING CORP

Strategy: Growth Investor
Based on: Martin Zweig

Smith & Wesson Holding Corporation is a manufacturer of firearms and a provider of accessory products for the shooting, hunting and rugged outdoor enthusiast. The Company operates through two segments: firearms and accessories. The firearm segment includes firearms, handcuffs and other related products sold through a distribution chain and direct sales to consumers and international, state and federal governments. The accessories segment consists of shooting, hunting and outdoor accessories. It manufactures an array of handguns, including revolvers and pistols; long guns, including modern sporting rifles, bolt action rifles and single shot rifles; handcuffs, and firearm-related products and accessories. It also provides shooting, hunting and outdoor accessories, including reloading, gunsmithing, gun cleaning supplies, tree saws and vault accessories. The Company sells its products under the Smith & Wesson, M&P, Thompson/Center Arms and Wheeler Engineering, among other brands.


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. SWHC's P/E is 8.85, based on trailing 12 month earnings, while the current market PE is 18.00. 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. SWHC's revenue growth is 12.77%, while it's earnings growth rate is 40.37%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, SWHC fails this criterion.


SALES GROWTH RATE: PASS

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (63%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (40.1%) of the current year. Sales growth for the prior must be greater than the latter. For SWHC this criterion has been met.


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


CURRENT QUARTER EARNINGS: PASS

The first of these criteria is that the current EPS be positive. SWHC's EPS ($0.57) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. SWHC's EPS for this quarter last year ($0.22) 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. SWHC's growth rate of 159.09% 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 SWHC is 20.19%. This should be less than the growth rates for the 3 previous quarters, which are 280.00%, 57.50%, and 138.46%. SWHC 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, 124.69%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 159.09%, (versus the same quarter one year ago) then the stock passes.


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

The EPS growth rate for the current quarter, 159.09% must be greater than or equal to the historical growth which is 40.37%. SWHC would therefore pass this test.


EARNINGS PERSISTENCE: FAIL

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. SWHC, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.40, 1.22, 1.47, 0.90, and 1.68, fails this test.


LONG-TERM EPS GROWTH: PASS

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. SWHC's long-term growth rate of 40.37%, 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. SWHC's Debt/Equity (51.69%) is not considered high relative to its industry (108.82%) 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 SWHC, this criterion has not been met (insider sell transactions are 219, while insiders buying number 83). 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.


UNIVERSAL FOREST PRODUCTS, INC.

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

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


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (21.19) relative to the growth rate (62.44%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for UFPI (0.34) is very favorable.


SALES AND P/E RATIO: PASS

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. UFPI, whose sales are $3,034.5 million, needs to have a P/E below 40 to pass this criterion. UFPI's P/E of (21.19) is considered acceptable.


INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for UFPI was 12.78% last year, while for this year it is 10.56%. Since inventory to sales has decreased from last year by -2.22%, UFPI passes this test.


EPS GROWTH RATE: FAIL

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


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for UFPI (15.04%) to be acceptable (equity is three to ten times debt). This ratio is one quick way to determine the financial strength of the company.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for UFPI (5.28%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for UFPI (-0.77%) 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.


NK LUKOIL PAO (ADR)

Strategy: Contrarian Investor
Based on: David Dreman

NK LUKOIL PAO is an energy company. The primary activities of LUKOIL and its subsidiaries are oil exploration, production, refining, marketing and distribution. The Company's segments include Exploration and Production; Refining, Marketing and Distribution, and Corporate and other. The Exploration and Production segment includes its exploration, development and production operations relating to crude oil and gas. These activities are located within Russia, with additional activities in Azerbaijan, Kazakhstan, Uzbekistan, the Middle East, Northern and Western Africa, Norway, Romania and Mexico. In addition to its production, the Company purchases crude oil in Russia and on international markets. The Refining, Marketing and Distribution segment includes refining, petrochemical and transport operations, marketing and trading of crude oil, natural gas and refined products, generation, transportation and sales of electricity, heat and related services.

MARKET CAP: PASS

Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. LUKOY has a market cap of $46,326 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. LUKOY's EPS for the past 2 quarters, (from earliest to most recent quarter) 1.20, 1.25 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. LUKOY fails this test as its EPS growth rate for the past 6 months (-8.75%) does not beat that of the S&P (24.57%).


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


P/E RATIO: PASS

The P/E of a company should be in the bottom 20% of the overall market. LUKOY's P/E of 7.55, based on trailing 12 month earnings, meets the bottom 20% criterion (below 13.41), and therefore passes 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. LUKOY's P/CF of 5.48 meets the bottom 20% criterion (below 7.57) 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. LUKOY's P/B is currently 0.74, which meets the bottom 20% criterion (below 1.04), 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%). LUKOY's P/D of 14.99 meets the bottom 20% criterion (below 20.37), 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: FAIL

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.83] or greater than 2). This is one identifier of financially strong companies, according to this methodology. LUKOY's current ratio of 1.71 fails the test.


PAYOUT RATIO: PASS

A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for LUKOY is 0.00%. Unfortunately, its historical payout ratio is not available. Nonetheless it passes the payout criterion, as this is a very low payout.


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 16.14%, and would consider anything over 27% to be staggering. The ROE for LUKOY of 7.32% is not high enough to pass this criterion.


PRE-TAX PROFIT MARGINS: FAIL

This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. LUKOY's pre-tax profit margin is 7.69%, thus failing this criterion.


YIELD: PASS

The company in question should have a yield that is high and that can be maintained or increased. LUKOY's current yield is 6.67%, while the market yield is 2.64%. LUKOY 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 54.62%. LUKOY's Total Debt/Equity of 27.53% is considered acceptable.


SANDERSON FARMS, INC.

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

Sanderson Farms, Inc. is a poultry processing company. The Company is engaged in the production, processing, marketing and distribution of fresh and frozen chicken, and the preparation, processing, marketing and distribution of processed and prepared chicken items. The Company sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, primarily under the Sanderson Farms brand name to retailers, distributors and casual dining operators principally in the southeastern, southwestern, northeastern and western United States, and to customers reselling frozen chicken into export markets. The Company conducts its chicken operations through Sanderson Farms, Inc. (Production Division) and Sanderson Farms, Inc. (Processing Division), and its prepared chicken business through Sanderson Farms, Inc. (Foods Division). Its prepared chicken product line includes approximately 70 institutional and consumer packaged partially cooked or marinated chicken items.


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. SAFM's P/S of 0.74 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. SAFM'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. SAFM 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 SAFM At this Point

Is SAFM a "Super Stock"? YES


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.SAFM's P/S ratio of 0.74 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%. SAFM's inflation adjusted EPS growth rate of 31.72% 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. SAFM's free cash per share of 4.88 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. SAFM, whose three year net profit margin averages 7.18%, passes this evaluation.



WADDELL & REED FINANCIAL, INC.

Strategy: Growth Investor
Based on: Martin Zweig

Waddell & Reed Financial, Inc. is a mutual fund and asset management company. The Company provides investment management, investment advisory, investment product underwriting and distribution and shareholder services administration to Waddell & Reed Advisors group of mutual funds, Ivy Funds, Ivy Funds Variable Insurance Portfolios, InvestEd Portfolios and 529 college savings plan (collectively, the Funds), and the Ivy Global Investors Fund SICAV and its Ivy Global Investors sub-funds (the IGI Funds), and institutional and separately managed accounts. Its retail products are distributed through third parties, such as other broker/dealers, registered investment advisors and various retirement platforms or through its sales force of independent financial advisors. The Company also markets its investment advisory services to institutional investors, either directly or through consultants. It operates its investment advisory business through Waddell & Reed Investment Management Company.


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. WDR's P/E is 8.96, based on trailing 12 month earnings, while the current market PE is 18.00. Therefore, it passes the first test.


REVENUE GROWTH IN RELATION TO EPS GROWTH: PASS

Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. WDR's revenue growth is 8.60%, while it's earnings growth rate is 9.88%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, WDR passes this criterion.


SALES GROWTH RATE: FAIL

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (-19.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-19%) of the current year. Sales growth for the prior must be greater than the latter. For WDR 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. WDR's EPS ($0.65) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. WDR's EPS for this quarter last year ($0.58) 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. WDR's growth rate of 12.07% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: FAIL

Compare the earnings growth rate of the past four quarters with long-term EPS growth rate. Earnings growth in the past 4 quarters should be at least half of the long-term EPS growth rate. A stock should not be considered if it posted several quarters of skimpy earnings. WDR had 3 quarters of skimpy growth in the last 2 years.


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, -36.96%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 12.07%, (versus the same quarter one year ago) then the stock passes.


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

The EPS growth rate for the current quarter, 12.07% must be greater than or equal to the historical growth which is 9.88%. WDR would therefore pass this test.


EARNINGS PERSISTENCE: FAIL

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. WDR, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.01, 2.25, 2.96, 3.71, and 2.94, fails this test.


LONG-TERM EPS GROWTH: FAIL

The final important criterion in this approach is that Earnings Growth be at least 15% per year. WDR's long-term growth rate of 9.88%, based on the average of the 3, 4 and 5 year historical eps growth rates, fails the minimum required.


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 WDR, this criterion has not been met (insider sell transactions are 85, while insiders buying number 7). 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.



Watch List

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

Ticker Company Name Current
Score
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EGOV NIC INC. 48%
TARO TARO PHARMACEUTICAL INDUSTRIES LTD. 45%
SUPN SUPERNUS PHARMACEUTICALS INC 45%
SLF SUN LIFE FINANCIAL INC 45%
FIZZ NATIONAL BEVERAGE CORP. 45%
CALM CAL-MAINE FOODS INC 44%
VSI VITAMIN SHOPPE INC 44%
VLO VALERO ENERGY CORPORATION 42%



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