Guru Analysis
| Strategy: Growth Investor
Based on: Martin Zweig |
| Banco Macro S.A. (the Bank) is a bank. The Bank offers traditional bank products and services to companies, including those operating in regional economies, as well as to individuals. The Bank offers savings and checking accounts, credit and debit cards, consumer finance loans (including personal loans), mortgage loans, automobile loans, overdrafts, credit-related services, home and car insurance coverage, tax collection, utility payments, automatic teller machines (ATMs) and money transfers. The Bank offers Plan Sueldo payroll services, lending, corporate credit cards, mortgage finance, transaction processing and foreign exchange. The Bank offers transaction services to its corporate customers, such as cash management, customer collections, payments to suppliers, payroll administration, foreign exchange transactions, foreign trade services, corporate credit cards and information services, such as its Datanet and Interpymes services. |
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. BMA's P/E is 13.90, based on trailing 12 month earnings, while the current market PE is 14.00. 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. BMA's revenue growth is 39.05%, while it's earnings growth rate is 38.36%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, BMA 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 (-6.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (33.8%) of the current year. Sales growth for the prior must be greater than the latter. For BMA 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. BMA's EPS ($1.30) pass this test.
QUARTERLY EARNINGS ONE YEAR AGO: PASS
The EPS for the quarter one year ago must be positive. BMA's EPS for this quarter last year ($0.11) 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. BMA's growth rate of 1,081.82% 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 BMA is 19.18%. This should be less than the growth rates for the 3 previous quarters which are -4.76%, 15.38% and 17.65%. BMA 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, 7.84%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 1,081.82%, (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, 1,081.82% must be greater than or equal to the historical growth which is 38.36%. BMA 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. BMA, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.15, 0.21, 0.27, 0.43 and 0.62, 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. BMA's long-term growth rate of 38.36%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. |
| Strategy: Price/Sales Investor
Based on: Kenneth Fisher |
| Sanderson Farms, Inc. is a poultry processing company which is engaged in the production, processing, marketing and distribution of fresh and frozen chicken and other prepared chicken items. In addition, the Company is engaged in the processing, marketing and distribution of prepared chicken through its wholly owned subsidiary, Sanderson Farms, Inc. (Foods Division). It produces a range of processed chicken products and prepared chicken items. It sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, under the Sanderson Farms brand name to retailers, distributors, and casual dining operators in the south-eastern, south-western, north-eastern and western United States and to customers who resell frozen chicken into export markets. During the fiscal year ended October 31, 2013 (fiscal 2013), it processed 452 million chickens, or over 3.0 billion dressed pounds. |
PRICE/SALES RATIO: PASS
The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. SAFM's P/S of 0.65 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors.
TOTAL DEBT/EQUITY RATIO: PASS
Less debt equals less risk according to this methodology. SAFM's Debt/Equity of 0.97% 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. SAFM is neither a Technology nor Medical company. Therefore the Price/Research ratio is not available and, hence, not much emphasis should be placed on this particular variable.
PRELIMINARY GRADE: Some Interest in SAFM At this Point
Is SAFM a "Super Stock"? YES
PRICE/SALES RATIO: PASS
The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.SAFM's P/S ratio of 0.65 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors.
LONG-TERM EPS GROWTH RATE: PASS
This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. SAFM's inflation adjusted EPS growth rate of 31.72% passes the test.
FREE CASH PER SHARE: PASS
This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. SAFM's free cash per share of 4.88 passes this criterion.
THREE YEAR AVERAGE NET PROFIT MARGIN: PASS
This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. SAFM, whose three year net profit margin averages 7.18%, passes this evaluation.
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FORUM ENERGY TECHNOLOGIES INC |
| Strategy: Book/Market Investor
Based on: Joseph Piotroski |
| Forum Energy Technologies, Inc. is an oilfield products company. The Company designs, manufactures and distributes products and engages in aftermarket services, parts supply and related services. Its product offering includes a mix of engineered capital products and replaced items that are used in the exploration, development, production and transportation of oil and natural gas. Its capital products are targeted at drilling rig equipment for rigs, upgrades and refurbishment projects; subsea construction and development projects; the placement of production equipment on producing wells, and downstream capital projects. Its engineered systems are components used on drilling rigs or in the course of subsea operations, while its consumable products are used to maintain operations at well sites in the well construction process, within the supporting infrastructure and at processing centers and refineries. Its segments are Drilling & Subsea and Production & Infrastructure. |
BOOK/MARKET RATIO: PASS
The first criteria of this strategy requires that a company be in the top 20% of the market based on the Book/Market ratio (which is the inverse of the Price/Book ratio). FET, which has a book to market ratio of 1.75, meets this criterion and thus this strategy will use the following rules to determine if it is a financially distressed firm or is unfairly trading at a discount to its book value.
The study conducted by Piotroski found that excess returns can be earned by holding a portfolio of high Book/Market stocks. He also found, however, that it is very important to separate companies that trade at a discount because they are financially distressed from companies that are unfairly trading at a discount. The following criteria are used to help provide this distinction.
RETURN ON ASSETS: PASS
As a first step to determining whether a firm is not financially distressed, this methodology requires that the return on assets for the most recent fiscal year be positive. FET's return on assets was 7.39% in the most recent year, therefore it passes this test.
CHANGE IN RETURN ON ASSETS: PASS
The next requirement is that the return on assets for the most recent fiscal year must be greater than the return on assets for the previous fiscal year. FET's return on assets was 7.39% in the most recent year and 5.63% in the previous year, therefore it passes this test.
CASH FLOW FROM OPERATIONS: PASS
In addition to the return on assets, the cash flow from operations for the most recent fiscal year must also be positive. This eliminates companies that are burning cash and therefore are more likely to be financially distressed. FET's cash flow from operations was $269.97 million in the most recent year, therefore it passes this test.
CASH COMPARED TO NET INCOME: PASS
This methodology requires that cash from operations for the most current fiscal year must be greater than net income for the most current fiscal year. FET's cash from operations was $269.97 million in the most recent year, while its net income was $164.26 million, therefore it passes this test.
CHANGE IN LONG TERM DEBT/ASSETS: PASS
The long term debt to assets ratio for the most recent fiscal year must be less than or equal to the previous fiscal year. FET's LTD/Assets was 0.19 in the most recent year and 0.24 in the previous year, therefore it passes this test.
CHANGE IN CURRENT RATIO: FAIL
As an additional test of firm solvency, the current ratio for the most recent fiscal year must be greater than the current ratio for the previous fiscal year. FET's current ratio was 3.17 in the most recent year and 3.68 in the previous year, therefore it fails this test.
CHANGE IN SHARES OUTSTANDING: FAIL
The issuance of new stock is considered by this methodology to be a sign that a company is not able to generate enough internal cash to fund its business. Therefore, shares outstanding for the most recent fiscal year must be less than or equal to shares outstanding for the previous fiscal year. FET's shares outstanding was 89.8 million in the most recent year and 89.2 million in the previous year, therefore it fails this test.
CHANGE IN GROSS MARGIN: PASS
As a sign that a company is expanding its profitability, this strategy requires that gross margin for the most recent fiscal year be greater than gross margin for the previous fiscal year. FET's gross margin was 32.00% in the most recent year and 31.00% in the previous year, therefore it passes this test.
CHANGE IN ASSET TURNOVER: PASS
The final criterion of this strategy requires that asset turnover for the most recent fiscal year be greater than asset turnover for the previous fiscal year. FET's asset turnover was 0.78 in the most recent year and 0.70 in the previous year, therefore it passes this test. |
ALTISOURCE PORTFOLIO SOLUTIONS S.A. |
| Strategy: P/E/Growth Investor
Based on: Peter Lynch |
| Altisource Portfolio Solutions S.A. is a provider of marketplace and transaction solutions for the real estate, mortgage and consumer debt industries offering both distribution and content. The Company operates in three segments: Mortgage Services, Financial Services and Technology Services. The Company's Mortgage Services segment provides services that span the mortgage and real estate lifecycle, and are outsourced by loan servicers, loan originators, investors and other sellers of single family homes. The Financial Services segment provides collection and customer relationship management services to debt originators and servicers, and the utility, insurance and hotel industries. The Company's Technology Services consists of REALSuite of software applications, Equator, LLC (Equator) software applications, Mortgage Builder software applications and its information technology (IT) infrastructure management services. |
DETERMINE THE CLASSIFICATION:
This methodology would consider ASPS a "fast-grower".
P/E/GROWTH RATIO: PASS
The investor should examine the P/E (6.33) relative to the growth rate (32.80%), 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 ASPS (0.19) 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. ASPS, whose sales are $1,037.5 million, needs to have a P/E below 40 to pass this criterion. ASPS's P/E of (6.33) 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 ASPS is 32.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.
TOTAL DEBT/EQUITY RATIO: NEUTRAL
ASPS 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. ASPS's Equity/Assets ratio (12.00%) is healthy and above the minimum 5% this methodology looks for, thus passing the criterion.
RETURN ON ASSETS: PASS
This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. ASPS's ROA (11.01%) 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 ASPS (21.41%) 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 ASPS (-74.49%) 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. |
| Strategy: Price/Sales Investor
Based on: Kenneth Fisher |
| Cal-Maine Foods, Inc. is a producer and marketer of shell eggs in the United States. The Company's primary business is the production, grading, packaging, marketing and distribution of shell eggs. The Company sells its shell eggs in the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States. The Company markets its shell eggs through its distribution network to a group of customers, including national and regional grocery store chains, club stores, foodservice distributors and egg product consumers. Some of its sales are completed through co-pack agreements. It has a total flock of approximately 33.7 million layers and 8.4 million pullets and breeders. The Company markets its specialty shell eggs under brands, such as Egg-Land's Best, Land O' Lakes, Farmhouse and 4-Grain. The Company also produces, markets and distributes private label specialty shell eggs to several customers. |
PRICE/SALES RATIO: PASS
The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratio between .75 and 1.5 are good values. CALM's P/S ratio of 1.15 based on trailing 12 month sales, falls within the "good values" range for non-cyclical companies and is considered attractive.
TOTAL DEBT/EQUITY RATIO: PASS
Less debt equals less risk according to this methodology. CALM's Debt/Equity of 3.30% 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. CALM 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 CALM At this Point
Is CALM a "Super Stock"? NO
PRICE/SALES RATIO: FAIL
The prospective company should have a low Price/Sales ratio. To be considered a "Super Stock", non-cyclical (non-Smokestack) companies should have Price/Sales ratios below .75. However, CALM, who has a P/S of 1.15, does not fall within the "Super Stock" range. It does fall between 0.75 and 1.5, which is considered the "good values" range for non-cyclical companies. Nonetheless, it does not pass this "Super Stock" criterion.
LONG-TERM EPS GROWTH RATE: PASS
This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. CALM's inflation adjusted EPS growth rate of 19.95% 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. CALM's free cash per share of 1.32 passes this criterion.
THREE YEAR AVERAGE NET PROFIT MARGIN: PASS
This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. CALM, whose three year net profit margin averages 7.24%, passes this evaluation.
|
LUMBER LIQUIDATORS HOLDINGS INC |
| Strategy: Patient Investor
Based on: Warren Buffett |
| Lumber Liquidators Holdings, Inc. (Lumber Liquidators) is a retailer of hardwood flooring, and hardwood flooring enhancements and accessories in North America. The Company's product categories include Solid and Engineered Hardwood; Laminate; Bamboo, Cork and Vinyl Plank, and Moldings and Accessories. The Company sells its products primarily to homeowners or to contractors on behalf of homeowners. The Company offers wood flooring under18 brand names, led by Bellawood, a collection of solid and engineered hardwood flooring, bamboo flooring, moldings and accessories. The Company also offers a range of flooring enhancements and installation accessories, including moldings, noise-reducing underlay and tools. It offers around 400 different flooring product stock-keeping units. As of February 23, 2015, Lumber Liquidators operated around 354 stores located in 46 states of the United States and nine store locations in Canada. |
STAGE 1: "Is this a Buffett type company?"
A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage.
LOOK FOR EARNINGS PREDICTABILITY: PASS
Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.40, 0.56, 0.48, 0.82, 0.97, 0.93, 0.93, 1.68, 2.77, 2.31. Buffett would consider LL's earnings predictable, although earnings have declined 3 time(s) in the past seven years, with the most recent decline 1 years ago. The dips have totaled 35.0%. LL's long term historical EPS growth rate is 22.6%, based on the 10 year average EPS growth rate.
LOOK AT THE ABILITY TO PAY OFF DEBT PASS
Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. LL has no long term debt and therefore would pass this criterion.
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 LL, over the last ten years, is 17.5%, 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 67.0%, 51.2%, 13.9%, 19.2%, 18.0%, 14.2%, 12.1%, 19.5%, 24.7%, 18.8%, and the average ROE over the last 3 years is 21.0%, thus passing this criterion.
LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: PASS
Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for LL, over the last ten years, is 22.8% and the average ROTC over the past 3 years is 21.0%, which is high enough to pass. It is not enough that the average be at least 12%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROTC must be at least 9% for Buffett to feel comfortable that the ROTC is consistent. The ROTC for the last 10 years, from earliest to latest, is 45.6%, 41.9%, 13.9%, 19.2%, 18.0%, 14.2%, 12.1%, 19.5%, 24.7%, 18.8%, 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. LL's free cash flow per share of $0.25 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 $11.85 and compares it to the gain in EPS over the same period of $1.91. LL's management has proven it can earn shareholders a 16.1% 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. LL's shares outstanding have fallen over the past five years from 27,469,999 to 27,000,000, 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 LL 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 $-0.72 and divide it by the current market price of $11.79. An investor, purchasing LL, could expect to receive a -6.11% initial rate of return. Furthermore, he or she could expect the rate to increase 22.6% 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: FAIL
Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 2.25%. Compare this with LL's initial yield of -6.11%, which will expand at an annual rate of 22.6%, based on the 10 year average EPS growth rate. Although the initial rate of return is lower than the treasury yield, Buffett has invested in solid companies regardless.
CALCULATE THE FUTURE EPS: [No Pass/Fail]
LL currently has a book value of $10.92. It is safe to say that if LL can preserve its average rate of return on equity of 17.5% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 17.5% and it will have a book value of $54.92 in ten years. If it can still earn 17.5% on equity in ten years, then expected EPS will be $9.63.
CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]
Now take the expected future EPS of $9.63 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (5 year average P/E in this case), which is 30.7 and you get LL's projected future stock price of $295.62.
CALCULATE THE EXPECTED RATE OF RETURN BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]
Now add in the total expected dividend pool to be paid over the next ten years, which is $-0.00. This gives you a total dollar amount of $295.62. These numbers indicate that one could expect to make a 38.0% average annual return on LL'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 22.6%, based on the 10 year average EPS growth rate, you can project EPS in ten years to be $-5.54. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (5 year average P/E in this case), which is 30.7. This equals the future stock price of $-170.20. Add in the total expected dividend pool of $-0.00 to get a total dollar amount of $-170.20.
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 $11.79 and the future expected stock price, including the dividend pool, of $-170.20. If you were to invest in LL at this time, you could expect a 0.00% 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: PASS
Based on the two different methods, you could expect an annual compounding rate of return somewhere between 0.0% and 38.0%. 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 19.0% on LL stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion. |
OCEANEERING INTERNATIONAL |
| Strategy: P/E/Growth Investor
Based on: Peter Lynch |
| Oceaneering International, Inc. is an oilfield provider of engineered services and products to the offshore oil and gas industry, with a focus on deep water applications. The Company's business segments are contained within two businesses, such as services and products provided to the oil and gas industry (Oilfield) and all other services and products (Advanced Technologies). The Company's four business segments within the Oil and Gas business includes Remotely Operated Vehicles (ROVs), Subsea Products, Subsea Projects and Asset Integrity. The Company also provides remote asset management software services. The Company provides services and products, such as remotely operated vehicles, specialty subsea hardware, engineering and project management, subsea intervention services, including manned diving, and asset integrity and non-destructive testing services. The Company's foreign operations are principally focused in the North Sea, Africa, Brazil, Australia and Asia. |
DETERMINE THE CLASSIFICATION:
This methodology would consider OII a "fast-grower".
P/E/GROWTH RATIO: PASS
The investor should examine the P/E (8.81) relative to the growth rate (20.99%), 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 OII (0.42) 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. OII, whose sales are $3,259.6 million, needs to have a P/E below 40 to pass this criterion. OII's P/E of (8.81) is considered acceptable.
INVENTORY TO SALES: PASS
When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for OII was 13.44% last year, while for this year it is 10.26%. Since inventory to sales has decreased from last year by -3.18%, OII passes this test.
EPS GROWTH RATE: PASS
This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for OII is 21.0%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.
TOTAL DEBT/EQUITY RATIO: PASS
This methodology would consider the Debt/Equity ratio for OII (50.19%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for OII should be good enough to compensate.
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 OII (7.84%) 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 OII (-13.98%) 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. |
| Strategy: Price/Sales Investor
Based on: Kenneth Fisher |
| Zumiez Inc. is a multi-channel specialty retailer of apparel, footwear, accessories and hardgoods. As of January 31, 2015, the Company operated 603 stores; 550 in the United States, 35 in Canada and 18 in Europe. The Company operates under the names Zumiez and Blue Tomato. Additionally, it operates e-commerce websites at www.zumiez.com and www.bluetomato.com. In apparel the Company offers t-shirts; baseball tees; hoodies and sweatshirts; tank tops; shorts; board shorts; joggers; shirts; jackets; jeans and pants; sweaters, and snow outerwear. The Company offers accessories, including hats, socks, watches, sunglasses, jewelry, backpacks, beanies, belts, wallets, underwear and bags. In addition it also offers cameras and tech; headphones; home; travel gear; hacky sacks; shoe laces; digital video discs (DVDs), scarves and gloves. |
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. ZUMZ's P/S of 0.60 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. ZUMZ's Debt/Equity of 0.00% is exceptional, thus passing the test.
PRICE/RESEARCH RATIO: PASS
This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. ZUMZ 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 ZUMZ At this Point
Is ZUMZ a "Super Stock"? YES
PRICE/SALES RATIO: PASS
The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.ZUMZ's P/S ratio of 0.60 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%. ZUMZ's inflation adjusted EPS growth rate of 18.26% 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. ZUMZ's free cash per share of 1.85 passes this criterion.
THREE YEAR AVERAGE NET PROFIT MARGIN: PASS
This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. ZUMZ, whose three year net profit margin averages 5.99%, passes this evaluation.
|
| Strategy: Growth/Value Investor
Based on: James P. O'Shaughnessy |
| Thor Industries, Inc. (Thor), manufactures and sells various recreational vehicles (RV) throughout the United States and Canada, as well as related parts and accessories. The principal types of The Company's towable recreational vehicles that the Company produces include conventional travel trailers and fifth wheels. In addition, it also produces truck and folding campers and equestrian, and other specialty towable recreational vehicles, as well as Class A, Class C and Class B motorhomes. The Company operates through two segments: towable recreational vehicles and motorized recreational vehicles. The Company through its operating subsidiaries manufactures recreational vehicles in North America. The subsidiaries are Airstream, Inc., CrossRoads RV, Thor Motor Coach, Inc., Keystone RV Company, Heartland Recreational Vehicles, LLC, Livin' Lite RV, Inc., Bison Coach, K.Z., Inc. and Postle Operating, LLC. |
MARKET CAP: PASS
The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. THO, with a market cap of $2,522 million, passes this criterion.
EARNINGS PER SHARE PERSISTENCE: PASS
The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. THO, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.66, 2.07, 2.86, 3.29 and 3.79, passes this test.
PRICE/SALES RATIO: PASS
The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. THO's Price/Sales ratio of 0.61, based on trailing 12 month sales, passes this criterion.
RELATIVE STRENGTH: FAIL
The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. THO has a relative strength of 55. This does not pass the final criterion. As a result, this methodology would not consider the stock even though it passed the previous three criteria. |
| Strategy: Patient Investor
Based on: Warren Buffett |
| Dril-Quip, Inc. designs, manufactures, sells and services engineered offshore drilling and production equipment. The Company's equipment is suited for use in deepwater, harsh environments and service applications. The Company's operates in Western Hemisphere, including North and South America; Eastern Hemisphere, including Europe and Africa and Asia-Pacific, including the Pacific Rim, Southeast Asia, Australia, India and the Middle East. It products include subsea equipment, surface equipment and offshore rig equipment. Its products are used to explore for oil and gas from offshore drilling rigs, such as floating rigs and jack-up rigs, and for drilling and production of oil and gas wells on offshore platforms, TLPs, Spars and moored vessels, such as FPSOs. Its services include technical advisory assistance services, reconditioning of its customer-owned products, and rental of running tools for installation and retrieval of its products. |
STAGE 1: "Is this a Buffett type company?"
A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage.
LOOK FOR EARNINGS PREDICTABILITY: PASS
Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.90, 2.15, 2.63, 2.62, 2.66, 2.55, 2.36, 2.94, 4.16, 5.19. Buffett would consider DRQ's earnings predictable, although earnings have declined 3 time(s) in the past seven years, with the most recent decline 4 years ago. The dips have totaled 12.0%. DRQ's long term historical EPS growth rate is 21.1%, based on the average of the 3, 4 and 5 year historical eps growth rates.
LOOK AT THE ABILITY TO PAY OFF DEBT PASS
Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. DRQ has no long term debt and therefore would pass this criterion.
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 DRQ, over the last ten years, is 14.4%. Although he prefers ROE to be 15% or higher, this level is acceptable to Buffett. 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 10.5%, 18.6%, 18.1%, 18.3%, 15.0%, 12.3%, 10.3%, 11.2%, 13.7%, 16.2%, and the average ROE over the last 3 years is 13.7%, thus passing this criterion.
LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: PASS
Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for DRQ, over the last ten years, is 14.4% and the average ROTC over the past 3 years is 13.7%, which is high enough to pass. It is not enough that the average be at least 12%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROTC must be at least 9% for Buffett to feel comfortable that the ROTC is consistent. The ROTC for the last 10 years, from earliest to latest, is 10.4%, 18.5%, 18.1%, 18.3%, 15.0%, 12.3%, 10.3%, 11.2%, 13.7%, 16.2%, 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. DRQ's free cash flow per share of $2.66 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 $28.16 and compares it to the gain in EPS over the same period of $4.29. DRQ's management has proven it can earn shareholders a 15.2% 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. DRQ's shares outstanding have fallen over the past five years from 40,040,001 to 39,000,000, 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 DRQ 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 $5.20 and divide it by the current market price of $49.90. An investor, purchasing DRQ, could expect to receive a 10.42% initial rate of return. Furthermore, he or she could expect the rate to increase 21.1% 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 2.25%. Compare this with DRQ's initial yield of 10.42%, which will expand at an annual rate of 21.1%, 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]
DRQ currently has a book value of $34.18. It is safe to say that if DRQ can preserve its average rate of return on equity of 13.7% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 13.7% and it will have a book value of $123.30 in ten years. If it can still earn 13.7% on equity in ten years, then expected EPS will be $16.88.
CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]
Now take the expected future EPS of $16.88 and multiply them by the lower of the 5 year average P/E ratio (23.4) or current P/E ratio (current P/E in this case), which is 9.6 and you get DRQ's projected future stock price of $161.88.
CALCULATE THE EXPECTED RATE OF RETURN BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]
Now add in the total expected dividend pool to be paid over the next ten years, which is $0.00. This gives you a total dollar amount of $161.88. These numbers indicate that one could expect to make a 12.5% average annual return on DRQ's stock at the present time. Although, the return is slightly below the liking of Buffett, the return would still be somewhat acceptable.
CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail]
If you take the EPS growth of 21.1%, based on the average of the 3, 4 and 5 year historical eps growth rates, you can project EPS in ten years to be $35.41. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (23.4) or current P/E ratio (current P/E in this case), which is 9.6. This equals the future stock price of $339.57. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $339.57.
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 $49.90 and the future expected stock price, including the dividend pool, of $339.57. If you were to invest in DRQ at this time, you could expect a 21.14% 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 12.5% and 21.1%. 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 16.8% on DRQ stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion. |
Watch List
The top scoring stocks not currently in the Hot List portfolio.
| Ticker |
Company Name |
Industry |
Current
Score |
| FB |
FACEBOOK INC |
Computer Services |
66% |
| TJX |
TJX COMPANIES INC |
Retail (Apparel) |
65% |
| JLL |
JONES LANG LASALLE INC |
Real Estate Operations |
63% |
| AFSI |
AMTRUST FINANCIAL SERVICES INC |
Insurance (Prop. & Casualty) |
62% |
| TREE |
LENDINGTREE INC |
Consumer Financial Services |
58% |
| DSW |
DSW INC. |
Retail (Apparel) |
57% |
| FL |
FOOT LOCKER, INC. |
Retail (Apparel) |
54% |
| MLI |
MUELLER INDUSTRIES, INC. |
Misc. Fabricated Products |
53% |
| FOSL |
FOSSIL GROUP INC |
Jewelry & Silverware |
53% |
| USNA |
USANA HEALTH SCIENCES, INC. |
Conglomerates |
52% |
|
