Economy & Markets

Stocks have recovered a lot of the ground they lost late last year and corporate profits are rolling in with positive results. Companies are cutting their profit expectations for this year but they are still seeing growth, and that has somewhat put to rest the recession fears that gripped the market in December. The wildcards are still the ongoing government shutdown in Washington, which has left 800,000 workers without paychecks and countless others scrambling to make up lost ground. The shutdown is shaving some growth off the economy for the first quarter and could be a factor for this year if it doesn't end soon. The S&P 500 is up more than 5% for the year, led by financials and energy, while health care and consumer staples are positive but lag other sectors. The Dow Jones Industrial Average is also up more than 5% this year. Valuations have fallen from last year's lofty heights. The S&P is trading at a forward multiple of 15.4, and the DJIA at 14.7.

Some numbers to watch:

1. The U.S. Senate rejected two more attempts late Thursday to end a stalemate over spending on a wall on the Southern border, extending the longest running partial government shutdown.

2. Globally government debt hit a record $66 trillion, about 80% of global output, Fitch said.

3. Consumer sentiment hit its lowest level since late 2016 according to University of Michigan's latest survey, showing the index fell to 90.7 from 98.3 in December.

4. Key economic data like GDP, retail sales and housing are being delayed because of the prolonged partial government shutdown.

5. Mortgage volume fell nearly 3% last week after rates rose slightly. And home sales plunged more than 6% in December, mystifying real estate professionals.

Recommended Reading

Jack Bogle, the founder of Vanguard Group and father of index mutual funds, died Jan. 16. He is credited with democratizing investing for ordinary people, lowering costs and shaking up Wall Street's establishment. He had to wait patiently for the trend to gain widespread acceptance, but as of his passing, Vanguard had grown to be one of the biggest asset managers, with trillions of dollars of retirement and other investments under its stewardship. Bogle taught investors that it was better to put their money in the market rather than try to guess at what individual stocks to buy. For more on his legacy, read more and see links below for articles and blog posts you may have missed.

Data Rich: Investors are soaking up data, jump-starting a once niche industry, according to a recent article in Barron's. Companies known for traditional investing processes are staffing up their data departments, such as Neuberger Berman and JP Morgan Chase, as well as some pensions. Read more

Manager Watch: WSJ names the four money managers to track this year Greenlight Capital's David Einhorn, D1 Capital's Daniel Sundheim, Fidelity's Kathleen Murphy and BlackRock's Mark Wiseman. Read more

Quant Views: Bloomberg recently profiled JPMorgan Chase's global head of macro quantitative and derivatives research Marko Kolanovic. He began developing his ideas about systematic investing strategies in 2015. The idea gained popularity, but he also acknowledges there are limitations as to how far a quantitative approach can get you. Read more

Guru Views: Speaking of profiles, CityWire recently wrote about father-and-son investors Jim and Patrick O'Shaughnessy, chief investment officer and chief executive respectively at quantitative money management firm O'Shaughnessy Asset Management. Jim O'Shaughnessy, who began his career in quantitative investing in 1987, has authored four best-selling books on finance. Read more

Bear Advice: Chief Investment Officer recently wrote about comments by Bridgewater Associates' Ray Dalio at last November's Greenwich Economic Forum. Dalio expressed concern that most stock investors are ill-prepared to handle the next bear market. He advised contrarians to prepare for the next bear market by having a strategic asset mix in their portfolios, maintaining a neutral balance in a downturn, and staying in good shape for the rebound. Read more

Asia's Winners: Asia's economies have outperformed their peers, with Malaysia being at the top of the list, Bloomberg reports. The article notes that Asia's economies have "stronger buffers against headwinds like Federal Reserve policy tightening," and that Malaysia's current-account surplus, stable valuations and economic growth outlook earned it a top ranking. Read more

Factor Focus: Factor investing has gained acceptance and an increase in demand, according to an Invesco study that involved interviews with key decision makers of more than 300 institutional and wholesale factor investors, Wealth Management reports. Nearly half of them started doing it in 2015 or more recently. The study found that the lack of "internal capabilities" was the most common barrier to factor investing, with the second most common barrier being lack of available products. Read more

Ivies Lag: Institutional Investors revealed a study of the nation's elite school endowments have trailed a passive portfolio of 60 percent stocks and 40 percent bonds over the past 10 years. Markov Processes International (MPI), the research and analytics firm that conducted the study, said this is the first instance in the 16 years it has been collecting data that these elite colleges have lagged the indexed portfolio. Read more

Bond Deals: According to AXA, corporate bonds are officially in a bear market, Bloomberg reports. A string of corporate warnings and the worst returns in a decade may point to the end of the U.S. economic expansion, but AXA is eyeing a buying opportunity. Read more

Investing Trap: Chris Hill of the Motley Fool radio show interviewed The Collaborative Fund's Morgan Housel about the psychology of investing and how humans behave when it comes to money. There is no amount of intelligence that can't be undone by poor emotions or poor behavior, Housel noted. He argued that the purpose of investing is "not to minimize boredom, but to maximize returns." Still, he noted, there's a "sports" element to investing that offers entertainment to certain types of people, but "can get dangerous." Read more

Loans Crack: The top-performing U.S. debt market is "showing a few cracks," according to Bloomberg, citing data showing that the percentage of new deals that had to increase pricing spiked in November to the highest level of 2018. Read more

Expectations Rule: In an investor call last October, fund manager Bill Miller said beliefs and expectations really drive markets rather than the actual fundamentals. The health of the U.S. economy is "outstanding" as evidenced by earnings growth, a still positively-sloped yield curve, solid wage growth, low unemployment and strong corporate profits. Read more

News on Hot List Stocks

CDW said it would acquire Scalar Decisions, a Canadian technology solutions provider. Terms of the transaction, which is expected to be completed in the first quarter, were not disclosed.

Jupiter Asset Management named former Janus Henderson boss Andrew Formica as its CEO now that Maarten Slendebroek has announced plans to leave on March 1.

ProPetro Holding announced preliminary fourth quarter revenue of $421 million to $426 million and said it had higher than expected activity levels and improved efficiencies.

UnitedHealth Group's Optum unit is trying to block a former executive from taking a new job at Berkshire Hathaway's joint health venture with Amazon.com and JP Morgan Chase.

Performance Update

Since our last newsletter, the S&P 500 returned 1.8%, while the Hot List returned 1.7%. So far in 2015, the portfolio has returned 7.4% vs. 5.4% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 187.3% vs. the S&P's 164.1% gain.

WisdomTree's Liqian Ren Answers Five Questions About Multi-Factor Investing

An investment strategy based on well-tested factors like value, momentum and quality has worked for some of Wall Street's most famous investors, but history also shows taken one at a time each can seriously underperform the market for an extended time. The value factor comes to mind. Certainly value investors have felt that pain over the last few years.

There is a way to smooth out the returns of any individual factor by combining them into a multi-factor portfolio, which reduces risk and produces comparable returns. Of course, combining factors is a complicated process. An investor has to take care to choose the right mix of factors that do their best job of tracking the market. On Validea, we are combining different investment criteria, or factors, in our guru strategies. Each of the models is made up a unique set of fundamental criteria and stocks that meet most of the hurdles are the ones that get the highest scores. So effectively, each of our models is made up of multiple factors and we are using our system to uncover the top tier of stocks that pass these tests.

But there are many ways to implement a multi-factor investing approach, which is why Validea sought some advice on building multi-factor strategies from Liqian Ren, WisdomTree's director of modern alpha. The PhD in economics is a quant by background, having worked at Vanguard, where she managed their factor funds.

Ren tells us very large institutional clients have been shifting to multi-factor indexes as benchmarks in the last three years. She thinks financial advisors and retail investors will pick up on the trend, too.

Our first question was about how to pick which factors to use. Value and momentum tend to get paired by a lot of places. But WisdomTree has a unique approach, where its multi-factor portfolios give investors access to US, emerging markets and international stocks. We asked Ren how she decides what combinations to use to balance risk and return.

Ren said WisdomTree is different in that it uses a correlation factor and it uses currency hedging in its international portfolios. She points to research that concluded there is a limited number of factors that stand the test of time. It's important to be able to identify them because otherwise investors waste a lot of time just culling inconsequential data for false leads.

Ren explains that at WisdomTree, they construct the quality factor using a number of observations, including return on equity, return on assets, gross profit over assets and cash flow over assets. For value, they use sales to price, book to price, earnings to price, estimated earnings to price, Ebitda to enterprise value and operating cash flow to price. For momentum, they look at risk-adjusted total return over historical six- and 12-month periods.

They don't use traditional low volatility strategies, which haven't proven to deliver consistent outperformance. This way, their combinations help reduce volatility while preserving alpha.

Second, we asked Ren about hedging currency risk, which many believe adds unnecessary costs without generating good returns. This is especially true about emerging markets investing, where differences in interest rates are greater. But Ren says they've found that hedging these currencies can lower the volatility of the strategy.

This is also true of developed markets and for multi-national US names. In fact, hedging currencies in a portfolio containing these stocks is an alpha generator in itself. Interest rates vary by as much as 2.5%, so hedging them can remove risk and boost return.

Next, we asked Ren about how to approach blending factors. One school of thought picks stocks based on individual factors and combines them, the other screens stocks for multiple factors each. Ren says they use the multi-factor approach from the bottom up.

They rank stocks by the characteristics chosen for each factor, and these ranked characteristics are equally weighted. Each stock has a single factor score for each factor. Then they generate a multi-factor composite.

She uses a basketball analogy to explain why. "If you want to win a basketball game, you don't want a team where one person is only great at 3-point shooting, the other only great in dribbling, and the other only great at passing the ball. You want a team with players who stand out at shooting but are also good at dribbling and passing the ball."

The result is that a factor will behave differently in a multi-factor portfolio than they necessarily would in a single factor approach.

We asked Ren about timing factor investing, too, knowing that factors can be out of favor for a long time. Some believe that tilting to out of favor factors works. Others believe the opposite.

Ren agreed that timing can add value if the noise is managed. She explained: "There are generally two approaches in factor timing: fundamental-based factor timing or exogenous information-based factor timing. Fundamental-based factor timing relies on fundamental measures such as value, momentum, or quality of a factor. Factor momentum and factor value that use valuation spreads between top and bottom deciles of the factor strategy are the usual starting points, since it translates naturally from stock momentum and stock valuation. Some also use quality spreads instead of valuation spreads to time factors."

Finally, we asked Ren about her thoughts on how portfolio size affects the approach. Focused portfolios can have significant tracking error. Ren said analysis shows their strategy hits capacity around $50 to $100 billion.

Part of this is because transaction costs increase with size, but those costs have come down.

Very concentrated portfolios can have high factor exposure but also underperform, so WisdomTree tries to maintain that balance of factor tilts and tracking error. "A lot of multi-factor products on the market right now are constrained to index limitations as soon as the products get launched. I am happy that as Director of Modern Alpha, our team will be continuously working to enhance and improve our investment process," she told Validea.

If you want to learn more about WisdomTree's factor-based strategies, go to their website . And continue to check Validea's blog and research for new insights on this important and increasingly popular concept.


Portfolio Holdings
Ticker Date Added Return
CACC 3/9/2018 19.4%
REPYY 10/19/2018 -5.3%
TOL 1/11/2019 -1.3%
LUKOY 12/14/2018 4.1%
CDW 12/14/2018 -7.5%
AYI 1/11/2019 -3.6%
INVA 1/11/2019 1.3%
JHG 1/11/2019 2.8%
PUMP 1/11/2019 11.2%
UNH 10/19/2018 0.3%


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

CACC   |   REPYY   |   TOL   |   LUKOY   |   CDW   |   AYI   |   INVA   |   JHG   |   PUMP   |   UNH   |  

CREDIT ACCEPTANCE CORP.

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

Credit Acceptance Corporation offers financing programs that enable automobile dealers to sell vehicles to consumers. The Company's financing programs are offered through a network of automobile dealers. The Company has two Dealers financing programs: the Portfolio Program and the Purchase Program. Under the Portfolio Program, the Company advances money to dealers (Dealer Loan) in exchange for the right to service the underlying consumer loans. Under the Purchase Program, the Company buys the consumer loans from the dealers (Purchased Loan) and keeps the amounts collected from the consumer. Dealer Loans and Purchased Loans are collectively referred to as Loans. As of December 31, 2016, the Company's target market included approximately 60,000 independent and franchised automobile dealers in the United States. The Company has market area managers located throughout the United States that market its programs to dealers, enroll new dealers and support active dealers.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (11.33) relative to the growth rate (30.32%), 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 CACC (0.37) 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. CACC, whose sales are $1,230.3 million, needs to have a P/E below 40 to pass this criterion. CACC's P/E of (11.33) is considered acceptable.


EPS GROWTH RATE: PASS

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for CACC is 30.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

CACC 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. CACC's Equity/Assets ratio (31.00%) 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. CACC's ROA (12.63%) 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 CACC (7.03%) 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 CACC (-50.20%) 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.

REPSOL SA (ADR)

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

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.


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. REPYY's P/S of 0.49 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. REPYY's Debt/Equity of 35.72% is acceptable, thus passing the test.


PRICE/RESEARCH RATIO: PASS

This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. REPYY 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 REPYY At this Point

Is REPYY a "Super Stock"? NO


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.REPYY's P/S ratio of 0.49 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%. REPYY's inflation adjusted EPS growth rate of 17.66% 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. REPYY's free cash per share of 1.71 passes this criterion.


THREE YEAR AVERAGE NET PROFIT MARGIN: FAIL

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. REPYY, whose three year net profit margin averages 2.19%, fails this evaluation.

TOLL BROTHERS INC

Strategy: Growth Investor
Based on: Martin Zweig

Toll Brothers, Inc. is engaged in designing, building, marketing, selling and arranging financing for detached and attached homes in luxury residential communities. The Company operates through two segments: Traditional Home Building and Toll Brothers City Living (City Living). Within the Traditional Home Building segment, it operates in five geographic segments in the United States: the North, consisting of Connecticut, Illinois, Massachusetts, Michigan, Minnesota, New Jersey and New York; the Mid-Atlantic, consisting of Delaware, Maryland, Pennsylvania and Virginia; the South, consisting of Florida, North Carolina and Texas; the West, consisting of Arizona, Colorado, Nevada and Washington, and California. City Living is the Company's urban development division. Its products include Traditional Home Building Product and City Living Product. Its Traditional Home Building Product includes detached homes, move-up, executive, estate, and active-adult and age-qualified lines of home.


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. TOL's P/E is 7.59, 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: 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. TOL's revenue growth is 20.24%, while it's earnings growth rate is 18.73%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, TOL 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 (166.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (9.3%) of the current year. Sales growth for the prior must be greater than the latter. For TOL 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. TOL's EPS ($2.08) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. TOL's EPS for this quarter last year ($0.42) 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. TOL's growth rate of 395.24% 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 TOL is 9.36%. This should be less than the growth rates for the 3 previous quarters, which are 43.14%, 42.62%, and 74.63%. TOL 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, 54.75%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 395.24%, (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, 395.24% must be greater than or equal to the historical growth which is 18.73%. TOL 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. TOL, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.97, 1.84, 1.98, 2.18 and 3.17, 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. TOL's long-term growth rate of 18.73%, 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. TOL's Debt/Equity (77.69%) is considered high relative to its industry (52.68%) 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 TOL, 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: 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. 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.

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 $58,987 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) 3.82, 3.89 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 (10.51%) does not beat that of the S&P (17.42%).


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 6.34, based on trailing 12 month earnings, meets the bottom 20% criterion (below 9.96), 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 4.06 meets the bottom 20% criterion (below 5.73) 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 0.93, which meets the bottom 20% criterion (below 0.94), and it therefore passes 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%). LUKOY's P/D of 22.57 does not meet the bottom 20% criterion (below 18.21), 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 [1.58] or greater than 2). This is one identifier of financially strong companies, according to this methodology. LUKOY's current ratio of 1.74 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 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 18.47%, and would consider anything over 27% to be staggering. The ROE for LUKOY of 15.71% is not high enough to pass this criterion.


PRE-TAX PROFIT MARGINS: PASS

This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. LUKOY's pre-tax profit margin is 9.40%, thus passing 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 4.43%, while the market yield is 2.60%. 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 47.42%. LUKOY's Total Debt/Equity of 14.30% is considered acceptable.

CDW CORP

Strategy: Growth Investor
Based on: Martin Zweig

CDW Corporation (CDW) is a provider of integrated information technology (IT) solutions in the United States, Canada and the United Kingdom. The Company's segments include Corporate, Public and Other. The Corporate segment consists of private sector business customers in the United States based on employee size between Medium/Large customers, which primarily includes organizations with more than 100 employees, and Small Business customers, which primarily includes organizations with up to 100 employees. Its Public segment comprises government agencies and education and healthcare institutions in the United States. Its Other segment includes Canada and CDW UK. The CDW Advanced Services business consists primarily of customized engineering services delivered by technology specialists and engineers, and managed services that include Infrastructure as a Service (IaaS) offerings. The Company has centralized logistics and headquarters functions that provide services to the segments.


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. CDW's P/E is 20.77, 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. CDW's revenue growth is 8.43%, while it's earnings growth rate is 30.96%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, CDW 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 (11.2%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (7.6%) of the current year. Sales growth for the prior must be greater than the latter. For CDW 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. CDW's EPS ($1.20) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. CDW's EPS for this quarter last year ($0.83) pass this test.


POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS

The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. CDW's growth rate of 44.58% 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 CDW is 15.48%. This should be less than the growth rates for the 3 previous quarters, which are 22.22%, 127.78%, and 25.84%. CDW 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, 44.15%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 44.58%, (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, 44.58% must be greater than or equal to the historical growth which is 30.96%. CDW 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. CDW, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.84, 1.42, 2.35, 2.56 and 2.83, 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. CDW's long-term growth rate of 30.96%, 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. CDW's Debt/Equity (277.37%) is considered high relative to its industry (51.30%) 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 CDW, this criterion has not been met (insider sell transactions are 25, while insiders buying number 42). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.

ACUITY BRANDS, INC.

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

Acuity Brands, Inc. is a provider of lighting solutions for commercial, institutional, industrial, infrastructure and residential applications throughout North America. The Company offers a portfolio of indoor and outdoor lighting and building management solutions for commercial, industrial, infrastructure and residential applications. The portfolio of lighting solutions include lighting products utilizing fluorescent, light emitting diode (LED), organic LED (OLED), high intensity discharge, metal halide, and incandescent light sources to illuminate a number of applications. The solutions portfolio of the Company includes modular wiring, LED drivers, sensors, glass and inverters sold primarily to original equipment manufacturers (OEMs). Its lighting and building management solutions are marketed under various brand names, including Lithonia Lighting and Holophane. Through its subsidiary, IOTA Engineering, L.L.C., the Company provides emergency lighting products and power equipment.


DETERMINE THE CLASSIFICATION:

AYI is considered a "True Stalwart", according to this methodology, as its earnings growth of 17.66% lies within a moderate 10%-19% range and its annual sales of $3,770 million are greater than the multi billion dollar level. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. AYI is attractive if AYI can hold its own during a recession.


INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for AYI was 9.37% last year, while for this year it is 11.19%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (1.82%) is below 5%.


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

The Yield-adjusted P/E/G ratio for AYI (0.82), based on the average of the 3, 4 and 5 year historical eps growth rates, is O.K.


EARNINGS PER SHARE: PASS

The EPS for a stalwart company must be positive. AYI's EPS ($7.88) would satisfy this criterion.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for AYI (20.37%) 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 AYI (5.99%) 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 AYI (-4.84%) 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.

INNOVIVA INC

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

Innoviva, Inc., formerly Theravance, Inc., is engaged in the development, commercialization and financial management of bio-pharmaceuticals. It focuses on the respiratory assets partnered with Glaxo Group Limited (GSK), including RELVAR/BREO ELLIPTA (fluticasone furoate (FF)/vilanterol (VI)) and ANORO ELLIPTA (umeclidinium bromide/vilanterol (UMEC/VI)). Under the Long-Acting Beta2 Agonist (LABA) Collaboration Agreement and the Strategic Alliance Agreement with GSK, the Company is eligible to receive the annual royalties from GSK on sales of RELVAR/BREO ELLIPTA. For other products combined with a LABA from the LABA collaboration, such as ANORO ELLIPTA, royalties are upward tiering and range from 6.5% to 10%. RELVAR/BREO is a once-a-day combination inhaled respiratory medicine consisting of a LABA (VI) and an inhaled corticosteroid (ICS), FF. ANORO ELLIPTA a once-daily medicine combining a long-acting muscarinic antagonist (LAMA), umeclidinium bromide (UMEC), with a LABA.


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. INVA's profit margin of 78.04% passes this test.


RELATIVE STRENGTH: FAIL

The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. Although INVA's relative strength of 89 is below the acceptable level, yet it is very close. Keep an eye on the stock as it could move into the acceptable range.


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

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for INVA (110.00% for EPS, and 26.81% for Sales) are good enough to pass.


INSIDER HOLDINGS: PASS

INVA's insiders should own at least 10% (they own 33.92% ) 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. INVA's free cash flow of $1.18 per share passes this test.


PROFIT MARGIN CONSISTENCY: PASS

INVA's profit margin has been consistent or even increasing over the past three years (Current year: 61.75%, Last year: 44.58%, Two years ago: -34.77%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.


R&D AS A PERCENTAGE OF SALES: FAIL

INVA has reduced their R&D expenditures(currently $1.4 million) over the past two years which is unacceptable. INVA is jeopardizing the future in order to boost current EPS numbers. This criterion is particularly important for high-tech and medical stocks because they are so R&D dependant.


CASH AND CASH EQUIVALENTS: PASS

INVA's level of cash $129.1 million passes this criteria. If a company is a cash generator, like INVA, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.


ACCOUNT RECEIVABLE TO SALES: PASS

This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for INVA was 35.08% last year, while for this year it is 32.47%. Since the AR to sales is decreasing by -2.60% the stock passes this criterion.


LONG TERM DEBT/EQUITY RATIO: PASS

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


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

The "Fool Ratio" is an extremely important aspect of this analysis. Unfortunately, INVA's "Fool Ratio" is not available due to a lack of one or more important figures. Hence, an opinion cannot be given at this time.

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

AVERAGE SHARES OUTSTANDING: PASS

INVA has not been significantly increasing the number of shares outstanding within recent years which is a good sign. INVA currently has 113.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.


SALES: PASS

Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. INVA's sales of $250.7 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". INVA passes the sales test.


DAILY DOLLAR VOLUME: PASS

INVA passes the Daily Dollar Volume (DDV of $21.4 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. INVA with a price of $19.65 passes the price test. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.


INCOME TAX PERCENTAGE: FAIL

INVA's income tax paid for the current year is not available. This could be the cause for some concern according to this strategy. However, because this is not a critical criterion, it should not make or break your investment decision. In order to ensure that you receive a fair analysis we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%).

JANUS HENDERSON GROUP PLC

Strategy: Growth Investor
Based on: Martin Zweig

Janus Henderson Group plc, formerly Henderson Group plc, is an independent asset manager, specializing in active investment. The Company is a client-focused global business with assets under management. It manages a range of actively managed investment products for institutional and retail investors, across five capabilities, which include European equities, global equities, global fixed income, multi-asset and alternatives, including private equity and property. The Company has its operations throughout the Europe, Middle East and Africa (EMEA), the United Kingdom, Asia and Australia. Its global fixed income covers fixed income asset classes, including government debt, secured assets, corporate debt and derivative instruments, using asset allocation and multiple investment techniques. Its European equities fund range encompasses a range of market capitalization specialisms. Its clients include financial professionals, private and institutional investors.


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. JHG's P/E is 8.22, 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: 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. JHG's revenue growth is 23.58%, while it's earnings growth rate is 10.90%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, JHG 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 (3.2%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (48.4%) of the current year. Sales growth for the prior must be greater than the latter. For JHG 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. JHG's EPS ($0.55) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. JHG's EPS for this quarter last year ($0.49) 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. JHG's growth rate of 12.24% 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 JHG is 5.45%. This should be less than the growth rates for the 3 previous quarters, which are 76.47%, 115.79%, and 150.00%. JHG 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, 112.00%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 12.24%, (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 JHG is 12.2%, 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, 12.24% must be greater than or equal to the historical growth which is 10.90%. JHG 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. JHG, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.20, 1.42, 2.78, 1.66, and 1.83, 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. JHG's long-term growth rate of 10.90%, 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 JHG, 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.

PROPETRO HOLDING CORP

Strategy: Contrarian Investor
Based on: David Dreman

ProPetro Holding Corp. is an oilfield services company. The Company provides hydraulic fracturing and other complementary services to upstream oil and gas companies, which are engaged in the exploration and production (E&P) of North American unconventional oil and natural gas resources. The Company operates through seven segments: hydraulic fracturing, cementing, acidizing, coil tubing, flowback, surface drilling and Permian drilling. Its pressure pumping segment includes cementing and acidizing operations. The Company's operations are focused in the Permian Basin. As of December 31, 2016, the Company's fleet consisted of 10 hydraulic fracturing units with an aggregate of 420,000 hydraulic horsepower (HHP).

MARKET CAP: FAIL

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. PUMP has a market cap of $1,361 million, therefore failing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. PUMP's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.45, 0.53 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. PUMP passes this test as its EPS growth rate over the past 6 months (26.19%) has beaten that of the S&P (17.42%). PUMP's estimated EPS growth for the current year is (1,500.00%), which indicates the company is expected to experience positive earnings growth. As a result, PUMP passes this test.


This methodology would utilize four separate criteria to determine if PUMP 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. Dreman uses the PE based on five year average earnings for cyclicals to counteract the fluctations in earnings they experience. PUMP's P/E of 5.70 meets the bottom 20% criterion (below 9.96), and therefore passes this test.


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

The P/CF of a company should be in the bottom 20% of the overall market. PUMP's P/CF of 6.50 does not meet the bottom 20% criterion (below 5.73), 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. PUMP's P/B is currently 2.52, which does not meet the bottom 20% criterion (below 0.94), 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%). PUMP's P/D is not available, and hence an opinion cannot be rendered at this time.


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


CURRENT RATIO: PASS

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.21] or greater than 2). This is one identifier of financially strong companies, according to this methodology. PUMP's current ratio of 1.22 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 PUMP is 0.00%, while its historical payout ratio has been 95.58%. 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 18.47%, and would consider anything over 27% to be staggering. The ROE for PUMP of 27.40% 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. PUMP's pre-tax profit margin is 10.74%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. PUMP's current yield is not available (or one is not paid) at the present time, while the market yield is 2.60%. Hence, this criterion cannot be evaluated.


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 119.79%. PUMP's Total Debt/Equity of 16.52% is considered acceptable.

UNITEDHEALTH GROUP INC

Strategy: Growth Investor
Based on: Martin Zweig

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


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. UNH's P/E is 21.84, 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. UNH's revenue growth is 13.53%, while it's earnings growth rate is 21.49%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, UNH 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 (12.2%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (12.4%) of the current year. Sales growth for the prior must be greater than the latter. For UNH 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. UNH's EPS ($3.10) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. UNH's EPS for this quarter last year ($2.44) 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. UNH's growth rate of 27.05% 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 UNH is 10.74%. This should be less than the growth rates for the 3 previous quarters, which are 28.70%, 28.45%, and 29.08%. UNH 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, 28.75%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 27.05%, (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 UNH is 27.0%, 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, 27.05% must be greater than or equal to the historical growth which is 21.49%. UNH 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. UNH, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 5.70, 6.01, 7.25, 9.50 and 12.19, 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. UNH's long-term growth rate of 21.49%, based on the average of the 3, 4 and 5 year historical eps growth rates, 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 UNH, this criterion has not been met (insider sell transactions are 14, while insiders buying number 65). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.


Watch List

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

Ticker Company Name Current
Score
AMTD TD AMERITRADE HOLDING CORP. 63%
SCHN SCHNITZER STEEL INDUSTRIES, INC. 57%
UVE UNIVERSAL INSURANCE HOLDINGS, INC. 53%
AGX ARGAN, INC. 47%
CBRE CBRE GROUP INC 47%
MASI MASIMO CORPORATION 41%
MMS MAXIMUS, INC. 41%
PCTY PAYLOCITY HOLDING CORP 41%
WAL WESTERN ALLIANCE BANCORPORATION 40%
PEP PEPSICO, INC. 39%



Disclaimer

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

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

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