Economy & Markets

Earnings season is shaping up to be a double-edged sword. S&P 500 companies are reporting solid gains in fourth quarter EPS, but they are slashing their guidance for the first quarter and the year. Analysts are now forecasting a decline in EPS for the first quarter, the first time since 2016. Comparisons to the strong 20%+ growth last year aren't helping. But companies are recognizing that the big tax boost isn't lasting, and a global slowdown in economic growth is taking its toll. For 2019, expectations are still looking for growth, but in the very low single-digits, a far cry from the low double-digit growth that was expected as recently as last fall. The bright side, many say, is the Federal Reserve, which seems inclined to leave interest rates alone this year. A clearer picture on where the U.S. stands on trade negotiations with China would likely bring relief to a market that has rallied from its December doldrums despite the negative outlook. The S&P 500 is trading at a current multiple around 20, led this year by gains in industrials, real estate and telecommunications services. The Dow Jones Industrial Average trades at a multiple of 17.9.

Some positive numbers :

1. The U.S. trade deficit with global partners fell in November as imports from China and other countries fell, narrowing the gap.

2. But the United Nations Conference on Trade and Development warned in a report that currency wars, protectionism and losses could mount if the U.S. and China fail to settle their trade differences.

3. American manufacturing worker productivity rose at a 1.3% seasonally adjusted annual rate in the fourth quarter, up from 1.1% in the third quarter, the Labor Department said.

Some not-so-positive numbers:

1. More banks were tightening their lending standards in the fourth quarter, according to the Fed's periodic survey of senior loan officers.

2. Natural disasters cost the U.S. $91 billion last year, according to the National Oceanic and Atmospheric Administration.

3. Mortgage demand weakened again, with application volume falling 2.5% last week compared to the previous week, according to the Mortgage Bankers Association. Volume is 10% below last year's level.

Recommended Reading

MarketWatch's Mark Hulbert writes that the annual rankings of mutual funds tempt investors with the prospect of gains, but usually it ends up badly. Using Morningstar data, he showed that if you invested in last year's top ranked fund (2017 calendar-year returns of 68.9%), you would have lost 6.9% in 2018 versus the S&P 500 loss of 4.4%. The lesson is that one-year returns are based mostly on luck, and funds are not likely to repeat in the second year. Chances are also high that the securities in the best-ranked fund are overvalued. Hulbert pointed to a recent study by Research Affiliates showing that those stocks in each industry sector with the largest market caps lagged behind the other stocks in their sectors by an average 4.2%. Read more about it here , and see below for links to blog posts and articles you may have missed.

Housing Crush: James Stack, who forecast the 2008 real estate crash as well as last year's housing slowdown, says housing could be headed for its worst year in a decade. Read more

Risk Outlook: Larry Swedroe writes in ETF.com about how to weather market volatility in light of the current market. The BAM Alliance director of research warned that bull markets end because of geopolitical risks or central bank policy to push rates higher. The current data, he says, doesn't indicate a recession is imminent, but there are some concerns to watch out for. Read more

Fed Watch: Former hedge fund manager Stanley Druckenmiller and former Federal Reserve Board member Kevin Warsh argue in a recent WSJ column that the Fed should suspend its "double-barreled blitz of higher interest rates and tighter liquidity." Read more

Conflict Rising: Ray Dalio, the founder of Bridgewater Associates, said a gauge his firm created to measure the level of global conflict is at its highest level in more than 70 years, according to Bloomberg Read more

Manager Selection: A new study from Chestnut Advisory Group shows that a fund manager's ability to earn investor trust is more important than their track record, according to Institutional Investor. According to the study, the top factors for investors when choosing an asset manager are the manager's level of understanding of the investment process, the manager's credibility, and the investor's understanding of the firm's risk management; Read more

Hedge Stars: Bridgewater Associates and Renaissance Technologies beat most other funds, generating $13 billion of combined profit for 2018, according to Bloomberg.The profits accounted for more than half the money generated by the top 20 managers last year. Read more

Berkshire Bulls: Barron's called last month's purchase of $19.9 million A shares of Berkshire Hathaway by Vice Chairman Ajit Jain a bullish sign for the stock. Jain seemed to be taking advantage of a 12% decline in Berkshire class A shares from their October high of around $336,000, when he paid an average of $296,515 for 67 shares, the article notes. Read more

Arnott's Views: In a podcast interview last month with the Investment Innovation Institute, Research Affiliate's Rob Arnott discussed a range of issues related to factor investing, quant strategies and research with host Daniel Grioli.

Here are some highlights. Read more

Debt Warning: Baupost Group's Seth Klarman warned that increasing political and social tensions around the globe may end in an economic disaster, pointing to increasing levels of sovereign debt since the 2008 financial crisis that could lead to financial "panic," according to a recent article in The New York Times. Read more

Value Strategy: Gotham Asset Management co-chief investment officer Joel Greenblatt talked to Bloomberg recently about his value investing approach. Greenblatt explained that his firm doesn't focus on price-earnings ratio but rather on a company's cash flow - and that they evaluate all S&P 500 companies "bottoms up" using data going back to 1990. Read more

Risky States: WSJ columnist Jason Zweig recently wrote about a state to state comparison of investor risk using data by Riskalyze. "Perhaps unsurprisingly," wrote Zweig, "New Yorkers scored near the top, at 85," topped only by Nebraskans (90), with residents of New Jersey, Florida, and New Mexico near the bottom. Read more

Hike Halt: Paul Tudor Jones says the Fed will stop hiking rates in the coming year, according to CNBC.com. "The one thing I would say is there's a high probability that this hike ... will be the last one for a long time," Jones told CNBC after the Fed's rate hike in December. He also said he expects increased volatility in the market Read more

Skeptical Outlook: Barry Ritholtz writes that this is the time of year when prognostications surface from strategists and analysts, but adds they should be taken with a grain of salt. Read more

PE Illusion CFA Institute analyzed private equity returns in the U.S. While the data shows outperformance, the article notes that the trend is "more illusion than reality. After all," it says, "private equity portfolio companies are typically valued on a quarterly basis so lack a daily time series. In addition, most portfolio company valuations are smoothed as they are conducted by external appraisers using business plans from the private equity firms." Read more

Performance Update

Since our last newsletter, the S&P 500 returned 2.4%, while the Hot List returned 2.0%. So far in 2015, the portfolio has returned 9.6% vs. 7.9% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 193.1% vs. the S&P's 170.5% gain.


The Fallen

As we rebalance the Validea Hot List, 8 stocks leave our portfolio. These include: Propetro Holding Corp (PUMP), Innoviva Inc (INVA), Janus Henderson Group Plc (JHG), Toll Brothers Inc (TOL), Cdw Corp (CDW), Acuity Brands, Inc. (AYI), Unitedhealth Group Inc (UNH) and Credit Acceptance Corp. (CACC).

The Keepers

2 stocks remain in the portfolio. They are: Repsol Sa (Adr) (REPYY) and Nk Lukoil Pao (Adr) (LUKOY).

The New Additions

We are adding 8 stocks to the portfolio. These include: Monolithic Power Systems, Inc. (MPWR), Royal Dutch Shell Plc (Adr) (RDS.A), Td Ameritrade Holding Corp. (AMTD), Mastercard Inc (MA), Penske Automotive Group, Inc. (PAG), Cbre Group Inc (CBRE), Essent Group Ltd (ESNT) and Monster Beverage Corp (MNST).

Latest Changes

Additions  
MONOLITHIC POWER SYSTEMS, INC. MPWR
ROYAL DUTCH SHELL PLC (ADR) RDS.A
TD AMERITRADE HOLDING CORP. AMTD
MASTERCARD INC MA
PENSKE AUTOMOTIVE GROUP, INC. PAG
CBRE GROUP INC CBRE
Essent Group Ltd ESNT
MONSTER BEVERAGE CORP MNST
Deletions  
PROPETRO HOLDING CORP PUMP
INNOVIVA INC INVA
JANUS HENDERSON GROUP PLC JHG
TOLL BROTHERS INC TOL
CDW CORP CDW
ACUITY BRANDS, INC. AYI
UNITEDHEALTH GROUP INC UNH
CREDIT ACCEPTANCE CORP. CACC

The Case Against Value Stocks

It's difficult to admit that your investment strategy could be wrong. You've put a lot of thought into it, tested it with data, followed the advice of investors who have found success with the same strategy, and have confidence in your conviction. It's the same steady worldview that has helped Warren Buffett earn his reputation as one of the world's greatest investors. Through thick and thin, war and peace, volatility and calm, Buffett's belief in value investing - picking well run companies on sale - has stood the test of time.

But what if Buffett was in the right place at the right time, and those who are more recent to investing are too late to have the same results? What's more, there are other well-known value investors who confirm your initial belief that it's the right strategy. AQR, Research Affiliates and O'Shaughnessy Asset Management have all run the data, too, and it supports the value style.

It's worthwhile to take a step back and consider your strategy from the other side, to listen to those who disagree with it and evaluate whether it might be time for a change.

We've made a list of some questions about value investing, from the opposite perspective.

1. Is the world different?

When the 2008 financial crisis erupted, the Fed and other central banks began an extraordinary period of next-to zero interest rates and massive asset purchases. All of this was done to stabilize the financial system. But an unprecedented decade of low rates led to a lot of risk taking without consideration for fundamentals, which are the foundation of value investing. Even though the Fed is reversing its easing policies, there is a case to be made that the last decade has permanently altered the thesis behind value.

2. Is the trade too crowded?

The amount of money chasing value stocks continues to rise in factor-based funds and others. Since the publication of Fama and French's three factor model, money has flooded the strategy. That has the potential to degrade or eliminate the value premium.

3. Is the capital becoming permanent?

If value investing isn't a short term solution, given evidence that it can be out of favor for years at a time, the data still shows it wins over the extremely long haul. Investors who follow it, like Buffett, have to have the iron resolve to stick with it. Behavioral finance knows that most investors aren't like this, at least until recently. It could be that this is changing, and that investors are getting more disciplined and are able to stay the course, crowding the trade.

4. Is big data uncovering more value traps?

The more data the better, right? Markets should get more efficient, uncovering the stocks that are cheap for reason. But it also means investors have more data to sift through, and some of it could get overlooked in fundamental analysis. A company's cash flow could look healthy, but alternative data could raise red flags. Historical fundamental analysis could fail the test, missing information that could make the difference between identifying a value stock and a value trap.

5. Is it wise to bet against technology?

Value investing tends to gravitate to certain sectors and underweight technology, which skews heavily to the growth stock category. Some believe that tech will drive the market going forward, and if that's the case, value doesn't have a bright future. It is also important to note that this issue can be addressed by following a sector neutral value approach that keeps its sector weights close to the benchmark. But if you follow unconstrained value models, this could continue to be a drag on performance.

We're not here to argue that value is dead. Far from it. We actually remain strong believers in it But it's worth pointing out that looking at the other point of view - escaping your own feedback loop - can help reset your perspective. At Validea, we have developed processes that help take the guesswork out of investing by allowing you to set emotion aside. But whatever strategy you are following, you should ask yourself whether you can put it to the test by taking the opposite view. Whether you end up agreeing with it or not, the practice will make you a better investor.

Newcomers to the Hot List

CBRE Group Inc. (CBRE) - This commercial real estate firm scores highly on the models tracking investing greats James O'Shaughnessy and Peter Lynch as well as Validea's portfolio tracking the momentum factor.

Essent Group Ltd. (ESNT) - The private mortgage insurance company scores well on our models tracking Peter Lynch and Martin Zweig as well as the momentum portfolio.

Mastercard Inc. (MA) - The credit card giant scores well on the model tracking the style of Warren Buffett.

Monolithic Power Systems Inc. (MPWR) - This company designs power semiconductor and power delivery products. It scores highly on the model tracking Peter Lynch as well as the momentum portfolio.

Monster Beverage Corp. (MNST) - The maker of energy drinks and sodas scores well on the model tracking Warren Buffett as well as on the momentum portfolio.

Penske Automotive Group Inc. (PAG) - This transportation services company scores well on models tracking James O'Shaughnessy and John Neff as well as the momentum portfolio.

Royal Dutch Shell Plc. (ADR) (RDS.A) - The energy production giant scores highly on the models tracking James O'Shaughnessy, Peter Lynch, David Dreman, and Kenneth Fisher.

TD Ameritrade Holding Corp. (AMTD) - The online brokerage scores well on the models tracking Martin Zweig and Peter Lynch and the momentum portfolio.

News on Hot List Stocks

Penske Automotive reported quarterly profit of $1.11 a share, falling short of the estimate by a nickel. Revenue was $5.4 billion for the quarter ending Dec. 31.

Essent Group is scheduled to report earnings on Feb. 8.


Portfolio Holdings
Ticker Date Added Return
RDS.A 2/8/2019 TBD
LUKOY 12/14/2018 7.3%
AMTD 2/8/2019 TBD
PAG 2/8/2019 TBD
REPYY 10/19/2018 -4.8%
MA 2/8/2019 TBD
ESNT 2/8/2019 TBD
MNST 2/8/2019 TBD
CBRE 2/8/2019 TBD
MPWR 2/8/2019 TBD


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

RDS.A   |   LUKOY   |   AMTD   |   PAG   |   REPYY   |   MA   |   ESNT   |   MNST   |   CBRE   |   MPWR   |  

ROYAL DUTCH SHELL PLC (ADR)

Strategy: Growth Investor
Based on: Martin Zweig

The Royal Dutch Shell plc explores for crude oil and natural gas around the world, both in conventional fields and from sources, such as tight rock, shale and coal formations. The Company's segments include Integrated Gas, Upstream, Downstream and Corporate. The Integrated Gas segment is engaged in the liquefaction and transportation of gas and the conversion of natural gas to liquids to provide fuels and other products, as well as projects with an integrated activity, ranging from producing to commercializing gas. The Upstream segment includes the operations of Upstream, which is engaged in the exploration for and extraction of crude oil, natural gas and natural gas liquids, and the marketing and transportation of oil and gas, and Oil Sands, which is engaged in the extraction of bitumen from mined oil sands and conversion into synthetic crude oil. The Downstream segment is engaged in oil products and chemicals manufacturing, and marketing activities.


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. RDS.A's P/E is 11.23, based on trailing 12 month earnings, while the current market PE is 15.00. 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. RDS.A's revenue growth is 2.97%, while it's earnings growth rate is 38.28%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, RDS.A fails this criterion.


SALES GROWTH RATE: FAIL

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (14.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (19.7%) of the current year. Sales growth for the prior must be greater than the latter. For RDS.A 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. RDS.A's EPS ($1.35) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. RDS.A's EPS for this quarter last year ($0.70) 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. RDS.A's growth rate of 92.86% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: FAIL

Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for RDS.A is 19.14%. This should be less than the growth rates for the 3 previous quarters which are 278.95%, 42.86% and -4.29%. RDS.A does not pass this test, which means that it does not have good, reasonably steady earnings.


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


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

If the growth rate of the prior three quarter's earnings, 51.45%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 92.86%, (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, 92.86% must be greater than or equal to the historical growth which is 38.28%. RDS.A 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. RDS.A, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.36, 0.30, 0.58, 1.80, and 2.80, 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. RDS.A's long-term growth rate of 38.28%, 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. RDS.A's Debt/Equity (38.67%) is not considered high relative to its industry (55.65%) 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 RDS.A, this criterion has not been met (insider sell transactions are 0, while insiders buying number 0). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.


NK LUKOIL PAO (ADR)

Strategy: Value Investor
Based on: Benjamin Graham

NK Lukoil PAO is an energy company. The primary activities of LUKOIL and its subsidiaries are oil exploration, production, refining, marketing and distribution. Its 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 related 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. 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. The Corporate and other segment includes operations related to finance activities, production of diamonds and certain other activities.


SECTOR: PASS

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


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $1 billion. LUKOY's sales of $116,094.0 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: FAIL

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. LUKOY's current ratio of 1.74 fails the test.


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

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for LUKOY is $7,787.0 million, while the net current assets are $10,411.7 million. LUKOY passes this test.


LONG-TERM EPS GROWTH: FAIL

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 10 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. LUKOY's EPS growth over that period of -37.3% fails the EPS growth test.


P/E RATIO: PASS

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. LUKOY's P/E of 12.70 (using the 3 year PE) passes this test.


PRICE/BOOK RATIO: PASS

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. LUKOY's Price/Book ratio is 0.96, while the P/E is 12.70. LUKOY passes the Price/Book test.


TD AMERITRADE HOLDING CORP.

Strategy: Patient Investor
Based on: Warren Buffett

TD Ameritrade Holding Corporation is a provider of securities brokerage services and related technology-based financial services. The Company provides its services to retail investors, traders and independent registered investment advisors (RIAs). The Company provides its services through the Internet, a national branch network and relationships with RIAs. The Company's products and services include common and preferred stock, exchange-traded funds, options, futures, foreign exchange, mutual funds, fixed income, new and secondary issue securities, margin lending, cash management services and annuities. The Company uses its platform to offer brokerage services to retail investors and investment advisors. In addition, it also offers various products and services to retail clients, such as touch-tone trading, trading over the Internet, real-time quotes, extended trading hours and direct access to market destinations.

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 1.10, 1.00, 1.11, 1.06, 1.22, 1.42, 1.49, 1.58, 1.64, 2.46. Buffett would consider AMTD's earnings predictable, although earnings have declined 2 time(s) in the past seven years, with the most recent decline 7 years ago. The dips have totaled 13.6%. AMTD's long term historical EPS growth rate is 6.3%, based on the 10 year average EPS growth rate.


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 AMTD, over the last ten years, is 15.5%, 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 18.1%, 15.3%, 14.9%, 13.0%, 14.3%, 16.3%, 16.3%, 16.4%, 12.9%, 17.3%, and the average ROE over the last 3 years is 15.5%, 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 AMTD, over the last ten years, is 3.2%, 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 3.5%, 3.9%, 3.6%, 3.0%, 3.1%, 3.3%, 3.0%, 2.9%, 2.4%, 3.7%, 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. AMTD's free cash flow per share of $2.11 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 $10.02 and compares it to the gain in EPS over the same period of $1.36. AMTD's management has proven it can earn shareholders a 13.6% return on the earnings they kept. This return is acceptable to Buffett, but he would prefer to see a return > 15%. Essentially, management is is doing a good 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. AMTD'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 AMTD 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 $3.13 and divide it by the current market price of $54.65. An investor, purchasing AMTD, could expect to receive a 5.73% initial rate of return. Furthermore, he or she could expect the rate to increase 6.3% per year, based on the 10 year average EPS growth rate, as this is how fast earnings are growing.


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

Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 3.25%. Compare this with AMTD's initial yield of 5.73%, which will expand at an annual rate of 6.3%, based on the 10 year average EPS 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]

AMTD currently has a book value of $14.89. It is safe to say that if AMTD can preserve its average rate of return on equity of 15.5% and continues to retain 70.73% of its earnings, it will be able to sustain an earnings growth rate of 11.0% and it will have a book value of $42.10 in ten years. If it can still earn 15.5% on equity in ten years, then expected EPS will be $6.52.


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

Now take the expected future EPS of $6.52 and multiply them by the lower of the 5 year average P/E ratio (23.5) or current P/E ratio (current P/E in this case), which is 17.4 and you get AMTD's projected future stock price of $113.67.


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 $13.05. This gives you a total dollar amount of $126.72. These numbers indicate that one could expect to make a 8.8% average annual return on AMTD's stock at the present time. The return is unacceptable to Buffett.


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

If you take the EPS growth of 6.3%, based on the 10 year average EPS growth rate, you can project EPS in ten years to be $5.79. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (23.5) or current P/E ratio (current P/E in this case), which is 17.4. This equals the future stock price of $100.97. Add in the total expected dividend pool of $13.05 to get a total dollar amount of $114.02.


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 $54.65 and the future expected stock price, including the dividend pool, of $114.02. If you were to invest in AMTD at this time, you could expect a 7.63% average annual return on your money. Buffett likes to see a 15% return, and would even go down to 12%.


LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: FAIL

Based on the two different methods, you could expect an annual compounding rate of return somewhere between 7.6% and 8.8%. 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 8.2% on AMTD stock for the next ten years, based on the current fundamentals. Buffett accepts a 12% return, although 15% is preferable. This return is unacceptable to Buffett, thus failing the criterion.


PENSKE AUTOMOTIVE GROUP, INC.

Strategy: Value Investor
Based on: Benjamin Graham

Penske Automotive Group, Inc. is an international transportation services company. The Company operates automotive and commercial truck dealerships principally in the United States, Canada and Western Europe, and distributes commercial vehicles, diesel engines, gas engines, power systems, and related parts and services principally in Australia and New Zealand. The Company's segments include Retail Automotive, consisting of its retail automotive dealership operations; Retail Commercial Truck, consisting of its retail commercial truck dealership operations in the United States and Canada; Other, consisting of its commercial vehicle and power systems distribution operations and other non-automotive consolidated operations, and Non-Automotive Investments, consisting of its equity method investments in non-automotive operations. The Company holds interests in Penske Truck Leasing Co., L.P. (PTL), a provider of transportation services and supply chain management.


SECTOR: PASS

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


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $1 billion. PAG's sales of $22,785.1 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: FAIL

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. PAG's current ratio of 1.01 fails the test.


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

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for PAG is $2,124.7 million, while the net current assets are $46.9 million. PAG fails this test.


LONG-TERM EPS GROWTH: PASS

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 10 years. We have data for 8 years, and have adjusted this requirement to be a 24% gain over the 8 year period. Companies with this type of growth tend to be financially secure and have proven themselves over time. PAG's EPS growth over that period of 190.1% passes the EPS growth test.


P/E RATIO: PASS

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. PAG's P/E of 11.00 (using the 3 year PE) passes this test.


PRICE/BOOK RATIO: PASS

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. PAG's Price/Book ratio is 1.41, while the P/E is 11.00. PAG passes the Price/Book test.


REPSOL SA (ADR)

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

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


MARKET CAP: PASS

The Cornerstone Value Strategy looks for large, well known companies whose market cap is greater than $1 billion. These companies exhibit solid and stable earnings. REPYY's market cap of $26,608 million passes this test.


CASH FLOW PER SHARE: PASS

The second criterion requires that the company exhibit strong cash flows. Companies with strong cash flow are typically the value oriented investments that this strategy looks for. The company's cash flow per share must be greater than the mean of the market cash flow per share ($2.03). REPYY's cash flow per share of $3.17 passes this test.


SHARES OUTSTANDING: PASS

This particular strategy looks for companies whose total number of outstanding shares are in excess of the market average (591 million shares). These are the more well known and highly traded companies. REPYY, who has 1,630 million shares outstanding, passes this test.


TRAILING 12 MONTH SALES: PASS

A company's trailing 12 month sales ($54,537 million) are required to be 1.5 times greater than the mean of the market's trailing 12 month sales ($23,194 million). REPYY passes this test.


DIVIDEND: PASS

The final step in the Cornerstone Value strategy is to select the 50 companies from the market leaders group (those that have passed the previous four criteria) that have the highest dividend yield. REPYY, with a dividend yield of 6.04%, is one of the 50 companies that satisfy this last criterion.


MASTERCARD INC

Strategy: Patient Investor
Based on: Warren Buffett

MasterCard Incorporated is a technology company that connects consumers, financial institutions, merchants, governments and businesses across the world, enabling them to use electronic forms of payment. The Company operates through Payment Solutions segment. The Company allows user to make payments by creating a range of payment solutions and services using its brands, which include MasterCard, Maestro and Cirrus. The Company provides a range of products and solutions that support payment products, which customers can offer to their cardholders. The Company's services facilitate transactions on its network among cardholders, merchants, financial institutions and governments. The Company's products include consumer credit and charge, commercial, debit, prepaid, commercial and digital. The Company's consumer credit and charge offers a range of programs that enables issuers to provide consumers with cards allowing users to defer payment.

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 1.12, 1.41, 1.48, 2.19, 2.56, 3.09, 3.35, 3.69, 4.38, 5.60. Buffett would consider MA's earnings predictable. In fact EPS have increased every year. MA's long term historical EPS growth rate is 17.2%, based on the average of the 3, 4 and 5 year historical eps growth rates.


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 MA, over the last ten years, is 54.6%, 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 35.0%, 33.2%, 30.8%, 37.5%, 39.4%, 50.8%, 60.8%, 69.2%, 83.3%, 105.7%, and the average ROE over the last 3 years is 86.1%, 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 MA, over the last ten years, is 20.5%, 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 16.4%, 19.5%, 16.9%, 20.8%, 20.7%, 22.5%, 22.6%, 21.0%, 21.3%, 22.9%, 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. MA's free cash flow per share of $4.46 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 $24.50 and compares it to the gain in EPS over the same period of $4.48. MA's management has proven it can earn shareholders a 18.3% 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. MA's shares outstanding have fallen over the past five years from 1,115,369,995 to 1,038,000,000, 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 MA 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 $5.59 and divide it by the current market price of $213.97. An investor, purchasing MA, could expect to receive a 2.61% initial rate of return. Furthermore, he or she could expect the rate to increase 17.2% per year, based on the average of the 3, 4 and 5 year historical eps growth rates, as this is how fast earnings are growing.


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

Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 3.25%. Compare this with MA's initial yield of 2.61%, which will expand at an annual rate of 17.2%, based on the average of the 3, 4 and 5 year historical eps growth rates. 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]

MA currently has a book value of $5.23. It is safe to say that if MA can preserve its average rate of return on equity of 54.6% and continues to retain 85.01% of its earnings, it will be able to sustain an earnings growth rate of 46.4% and it will have a book value of $236.51 in ten years. If it can still earn 54.6% on equity in ten years, then expected EPS will be $129.07.


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

Now take the expected future EPS of $129.07 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (38.3) (5 year average P/E in this case), which is 31.2 and you get MA's projected future stock price of $4,024.27.


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 $22.15. This gives you a total dollar amount of $4,046.42. These numbers indicate that one could expect to make a 34.2% average annual return on MA's stock at the present time. Buffett would consider this an absolutely fantastic expected return.


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

If you take the EPS growth of 17.2%, based on the average of the 3, 4 and 5 year historical eps growth rates, you can project EPS in ten years to be $27.22. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (38.3) (5 year average P/E in this case), which is 31.2. This equals the future stock price of $848.62. Add in the total expected dividend pool of $22.15 to get a total dollar amount of $870.76.


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 $213.97 and the future expected stock price, including the dividend pool, of $870.76. If you were to invest in MA at this time, you could expect a 15.07% average annual return on your money. Buffett would consider this a great return.


LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: PASS

Based on the two different methods, you could expect an annual compounding rate of return somewhere between 15.1% and 34.2%. 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 24.6% on MA stock for the next ten years, based on the current fundamentals. Buffett would consider this an exceptional return, thus passing the criterion.


ESSENT GROUP LTD

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

Essent Group Ltd. is a private mortgage insurance company. The Company is engaged in offering private mortgage insurance and reinsurance for mortgages secured by residential properties located in the United States. Its products and services include mortgage insurance, contract underwriting, and Bermuda-based insurance and reinsurance. The Company's primary mortgage insurance is offered to customers on individual loans at the time of origination on a flow basis, but can also be written in bulk transactions. Its pool insurance provides additional credit enhancement for certain secondary market and other mortgage transactions. The primary mortgage insurance operations were conducted through Essent Guaranty, Inc. which is a mortgage insurer licensed to write mortgage insurance in all 50 states and the District of Columbia, as of December 31, 2016. It offers primary mortgage insurance, pool insurance and master policy. It provides contract underwriting services through CUW Solutions, LLC.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (9.64) relative to the growth rate (42.52%), based on the average of the 3 and 4 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 ESNT (0.23) 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. ESNT, whose sales are $687.3 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 ESNT is 42.5%, based on the average of the 3 and 4 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: NEUTRAL

ESNT 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. ESNT's Equity/Assets ratio (74.00%) 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. ESNT's ROA (15.20%) 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 ESNT (9.38%) 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 ESNT (-4.49%) 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.


MONSTER BEVERAGE CORP

Strategy: Growth Investor
Based on: Martin Zweig

Monster Beverage Corporation develops, markets, sells and distributes energy drink beverages, sodas and/or concentrates for energy drink beverages, primarily under various brand names, including Monster Energy, Monster Rehab, Monster Energy Extra Strength Nitrous Technology, Java Monster, Muscle Monster, Mega Monster Energy, Punch Monster, Juice Monster, Ubermonster, BU, Mutant Super Soda, Nalu, NOS, Burn, Mother, Ultra, Play and Power Play, Gladiator, Relentless, Samurai, BPM and Full Throttle. The Company has three segments: Monster Energy Drinks segment, which consists of its Monster Energy drinks, as well as Mutant Super Soda drinks; Strategic Brands segment, which includes various energy drink brands owned through The Coca-Cola Company (TCCC), and Other segment (Other), which includes the American Fruits & Flavors (AFF) third-party products. The Strategic Brands segment sells concentrates and/or beverage bases to authorized bottling and canning operations.


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. MNST's P/E is 32.73, based on trailing 12 month earnings, while the current market PE is 15.00. 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. MNST's revenue growth is 10.62%, while it's earnings growth rate is 20.03%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, MNST fails this criterion.


SALES GROWTH RATE: FAIL

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (11.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (12%) of the current year. Sales growth for the prior must be greater than the latter. For MNST 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. MNST's EPS ($0.48) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. MNST's EPS for this quarter last year ($0.38) 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. MNST's growth rate of 26.32% 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 MNST is 10.02%. This should be less than the growth rates for the 3 previous quarters, which are 40.00%, 22.58%, and 26.32%. MNST 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: FAIL

If the growth rate of the prior three quarter's earnings, 29.29%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 26.32%, (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 MNST is 26.3%, and it would therefore fail this test.


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

The EPS growth rate for the current quarter, 26.32% must be greater than or equal to the historical growth which is 20.03%. MNST 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. MNST, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.65, 0.92, 0.95, 1.19 and 1.50, 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. MNST's long-term growth rate of 20.03%, 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. MNST's Debt/Equity (0.00%) is not considered high relative to its industry (107.97%) 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 MNST, this criterion has not been met (insider sell transactions are 3, while insiders buying number 5). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.


CBRE GROUP INC

Strategy: Growth Investor
Based on: Martin Zweig

CBRE Group, Inc. is a holding company that conducts all of its operations through its subsidiaries. The Company operates as a commercial real estate services and investment company. The Company operates through the segments: The Americas; Europe, Middle East and Africa (EMEA); Asia Pacific; Global Investment Management, and Development Services. The Company provides commercial real estate services under the CBRE brand name, investment management services under the CBRE Global Investors brand name and development services under the Trammell Crow Company brand name. The Company's business is focused on commercial property, corporate facilities, project and transaction management, tenant/occupier and property/agency leasing, capital markets solutions (property sales, commercial mortgage brokerage, loan origination and servicing) real estate investment management, valuation, development services and proprietary research.


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. CBRE's P/E is 16.13, based on trailing 12 month earnings, while the current market PE is 15.00. 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. CBRE's revenue growth is 17.17%, while it's earnings growth rate is 23.02%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, CBRE fails this criterion.


SALES GROWTH RATE: FAIL

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (13.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (15.1%) of the current year. Sales growth for the prior must be greater than the latter. For CBRE 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. CBRE's EPS ($0.84) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. CBRE'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. CBRE's growth rate of 44.83% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: FAIL

Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for CBRE is 11.51%. This should be less than the growth rates for the 3 previous quarters which are 16.67%, 10.00% and 13.56%. CBRE does not pass this test, which means that it does not have good, reasonably steady earnings.


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


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

If the growth rate of the prior three quarter's earnings, 14.12%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 44.83%, (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, 44.83% must be greater than or equal to the historical growth which is 23.02%. CBRE 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. CBRE, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.87, 1.45, 1.63, 1.69 and 2.45, 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. CBRE's long-term growth rate of 23.02%, 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. CBRE's Debt/Equity (73.94%) is not considered high relative to its industry (190.32%) 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 CBRE, this criterion has not been met (insider sell transactions are 0, while insiders buying number 0). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.


MONOLITHIC POWER SYSTEMS, INC.

Strategy: Contrarian Investor
Based on: David Dreman

Monolithic Power Systems, Inc. designs, develops and markets integrated power semiconductor solutions and power delivery architectures. The Company operates in the design, development, marketing and sale of power solutions for the communications, storage and computing, consumer and industrial markets segment. The Company's product families include Direct Current (DC) to DC Products, and Lighting Control Products. The Company's DC to DC integrated circuits (ICs) are used to convert and control voltages within a range of electronic systems, such as portable electronic devices, wireless local area network (LAN) access points, computers, monitors, automobiles and medical equipment. Lighting control ICs are used in backlighting and general illumination products. In addition to Alternating Current (AC)/DC offline solutions for lighting illumination applications, the Company also offers AC/DC power conversion solutions for end products that plug into a wall outlet.

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. MPWR has a market cap of $5,559 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. MPWR's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.55, 0.71 have been increasing, and therefore the company passes this test.


EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: PASS

This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. MPWR passes this test as its EPS growth rate over the past 6 months (31.48%) has beaten that of the S&P (5.12%). MPWR's estimated EPS growth for the current year is (39.18%), which indicates the company is expected to experience positive earnings growth. As a result, MPWR passes this test.


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


P/E RATIO: FAIL

The P/E of a company should be in the bottom 20% of the overall market. MPWR's P/E of 40.55, based on trailing 12 month earnings, is higher than the bottom 20% criterion (below 10.29), and therefore fails this test.


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

The P/CF of a company should be in the bottom 20% of the overall market. MPWR's P/CF of 35.55 does not meet the bottom 20% criterion (below 5.81), and therefore fails this test.


PRICE/BOOK (P/B) VALUE: FAIL

The P/B value of a company should be in the bottom 20% of the overall market. MPWR's P/B is currently 9.11, which does not meet the bottom 20% criterion (below 0.96), and it therefore fails this test.


PRICE/DIVIDEND (P/D) RATIO: FAIL

The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). MPWR's P/D of 108.70 does not meet the bottom 20% criterion (below 18.80), and it therefore fails this test.


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


CURRENT RATIO: PASS

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [3.07] or greater than 2). This is one identifier of financially strong companies, according to this methodology. MPWR's current ratio of 6.52 passes 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 MPWR is 34.23%, while its historical payout ratio has been 57.24%. Therefore, it passes the payout criterion.


RETURN ON EQUITY: PASS

The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 18.35%, and would consider anything over 27% to be staggering. The ROE for MPWR of 25.69% is high enough to pass this criterion.


PRE-TAX PROFIT MARGINS: PASS

This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. MPWR's pre-tax profit margin is 20.15%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. MPWR's current yield is 0.92%, while the market yield is 2.63%. MPWR fails this test.


LOOK AT THE TOTAL DEBT/EQUITY: PASS

The company must have a low debt to equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should be less than 20% or less than the industry average. MPWR's Total Debt/Equity of 0.00% is considered exceptional.



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