Economy & Markets

The year began optimistically, but within months seemingly everyone was convinced things were heading straight to a recession. The trade war had created uncertainty and leading business chiefs to talk less confidently, which sent the financial markets into a roller coaster ride. Remember all that talk about the yield curve inversion? Short term rates were, for a while, higher than longer term rates, something that has signaled a recession ahead in past years. But then things went back to normal. The talk of recession started to fade away, especially after the Federal Reserve cut interest rates again. The expectation that growth would be lower than before settled in, but recession fears gave way to talk of a milder slowdown. Stocks have rallied to fresh all-time highs. Job numbers are still at decades-old records and, contrary to the trouble in the retailing sector, consumers are spending, and consumer confidence is relatively strong going into the holiday shopping season. With 2020 just around the corner, strategists are predicting that the bull market, now a decade old, will keep going. The Dow Jones Industrial Average is trading at an estimated price to earnings of 18.65, while the S&P 500 is trading at an estimated 19.18. Nearly all the sectors of the S&P are up double-digits from the beginning of the year, led by technology (up 41% year-to-date), communication services (+28%), financials (+26%), and industrials (+25%). The lagging sectors so far this year are energy (+3%), health care (+15%), and materials (+18%).

Some numbers to watch :

1. The latest weekly jobless claims climbed to a more than 2-year high despite strong job numbers, but it may not signal an uptick in layoffs, Reuters reported.

2. Producer prices unexpectedly remained unchanged in November, pointing to muted inflation despite a recent gain in consumer prices.

3. Consumer prices rose 0.3% in November, more than expected, as households spent more for gasoline, according to the Labor Department.

4. Worker productivity fell the most in four years in the third quarter, according to the Labor Department. Nonfarm productivity fell at a 0.2% rate, but payrolls soared in November by 266,000.

5. The U.S. trade deficit fell 7.6% in October to $47.2 billion, the lowest in more than a year, the Commerce Department said.

Recommended Reading

Some of the biggest U.S. companies are sitting on piles of cash, frustrating investors, who wonder why they aren't spending, according to CNBC. Microsoft, Berkshire Hathaway, Alphabet, and Apple each have more than $100 billion of cash on their books. Facebook, Amazon, Ford, and Oracle also have tens of billions on hand. Typical uses of cash are capital investment and acquisitions, and companies often have flexibility to return cash to shareholders in buybacks and dividend hikes. Some companies, such as Berkshire, are doing buybacks but observers wonder whether it's enough, the report said. Evercore's Lee Horowitz said tech companies in particular like to keep big cash balances as "dry powder" in the face of a possible downturn. For more on this read here , and see below for articles and blog posts you may have missed.

New Ratings: Morningstar revised its ratings system to apply a zero-fee benchmark hurdle when analyzing funds. This is helpful to investors but will ding managers. Under the new system there have been twice as many downgrades as upgrades. Read more

Alpha Slump: Active managers have a tough time keeping alpha because they hold positions for too long, according to an article in Institutional Investor, quoting a study by Essentia Analytics. Managers do generate alpha beyond the fees they charge but make the mistake of holding their positions too long, giving back some of the gains. Read more

Stepping Down: Louis Bacon is stepping away from Moore Capital Management, which is returning money to investors in three of its funds, according to Bloomberg. Bacon, who made his name exploiting differences in global rates and bond yields, has found fewer opportunities as central banks continue to ease monetary policy. Read more

Value Challenges: There are many reasons value strategies aren't working. Institutional Investor recently wrote about the challenges facing value investors, including a growing price differential between value and growth stocks, the complexities of accounting for intangibles when evaluating stocks, and strong corporate profits enabling high growth companies to keep their growth for longer. Read more

New Factor: Dimensional Fund Advisors has added a new factor based on the behavior of companies with high levels of investment, Institutional Investor reports. Companies with lower cash flows and higher investment levels have lower expected returns in the future. Read more

Golden Signal: A golden cross may be forming in the Russell 2000 index, which tracks the small cap universe, according to MarketWatch. That's a technical signal that the 50-day moving average crossed above the 200-day average, meaning it's not just a rebound but a longer term upswing. Read more

Emerging Markets: The Financial Times recently examined whether emerging market stocks are a good deal, as some claim. The article says emerging market stocks can only outperform developed markets if their respective currencies appreciate. Read more

Return Dystopia: CFA Institute recently talked to AQR's Antti Ilmanen about how investors can adapt to a low-interest rate environment. He warns investors to stop trying to time the market. Low rates for a prolonged time could lead to a "returns dystopia." Read more

Quant Tips: Investors can learn some lessons from Jim Simons, the quant legend. MarketWatch highlighted a few recently. Make long-term investments, keep your cool, try to ignore hype, and remain focused on your goals are some of them. Read more

Value Play: J.P. Morgan's Marko Kolanovic says the rotation into value that began two months ago will continue into 2020, and he described it as a "once in a decade" trade. Read more

Berkshire Deal: Warren Buffett's Berkshire Hathaway made a $5 billion offer for technology distributor Tech Data Corp. but was beaten out by the private equity firm Apollo Global Management, according to The Wall Street Journal. Apollo offered a higher price and Berkshire wouldn't engage in a bidding war. Read more

True Diversity: Since the start of 2019, the cumulative returns of volatility and quality factors as well as momentum and value have moved in opposite directions. But Nomura quant strategist Joseph Mezrich argued in Barron's recently that this isn't necessarily a signal of true diversity. Read more

Best Stock: A $100 investment in Netflix in 2000 would be $23,000 today, according to MarketWatch, making it the second-best performer of this century. The best? Energy drink-maker Monster. A $100 investment back then would be worth $62,444 now. Read more

Stock Boon: Paul Tudor Jones thinks low interest rates and budget deficit spending will be a boon for stock markets, according to Bloomberg, which covered a recent speech the hedge fund manager gave at the Greenwich Economic Forum. Read more

Equity Outlook: DoubleLine's Jeff Gundlach says investors should be preparing for the next downturn, even though we don't know when it will come. He said in a recent interview that he was concerned that US equities faced significant disruptions because of the level of government and corporate debt. Read more

Earnings Beats: Investors bid up shares of companies that exceeded earnings expectations but willingly overlooked earnings misses, according to an analysis by The Wall Street Journal. Shares of companies topping expectations rose 2% after reporting, better than the 1% five-year average, while those that disappointed fell an average of 2.1%, better than the 2.6% five-year average. Read more

Most Profitable: Berkshire Hathaway is the world's most profitable company, reporting net income for the year through September of $5.2 billion. Bloomberg notes Warren Buffett's conglomerate has a cash pile of $128 billion to put to work on deals and buybacks. Read more

Small Stall: Small cap stocks, which can be riskier in times of stress, have stalled as economic data weakens investor expectations about continued economic growth, according to a recent article in the WSJ. Read more

Fee Proposal: Active management's problem isn't higher fees, it's the fact that managers charge the fixed fee for uncertain performance. So Westwood's Philip DeSantis argues managers should charge nothing for managing capital and 30% for outperformance. Read more

Active Outflows: HFR research indicates clients have withdrawn money from stock-picking hedge funds for the last three years, the longest run of outflows since 1990, when it began tracking data. Read more

Value Surge: September was the strongest for value strategies in yeas, but the surge in value stocks wasn't enough to affect long-term trends, according to an analysis by Morningstar. Read more

Small Slog: Small stocks beat out growth stocks if you're willing to wait through the slow periods, according to Barron's, which quotes Jeff John, the manager of the American Century Small Cap Value Fund. Read more

Hot Growth: Value isn't dead so much as growth's performance has been abnormally high as a strategy, according to Dimensional Fund Advisors. Value has been more in line with historic performance for the last decade, and some of the strongest periods of performance have come after the strategy lagged growth for a while. Read more

Gambling Tips: Poker strategy can have applications to investing. Carnegie Mellon's Kevin Zollman says investors dislike losing more than winning and tend to sell assets that have increased in value but hold losing positions. Traders and poker players need resilience to deal with uncertainty. Read more

Market Risk: It's a myth that stocks collapsed in 1929 because specuRobotors had driven the market to absurd heights, according to WSJ's Jason Zweig. Most company stocks traded around 14 times to 19 times earnings at the time. It's a lesson that stocks are risky even if you are a buy and hold investor. Read more


The Fallen

As we rebalance the Validea Hot List, 3 stocks leave our portfolio. These include: D. R. Horton Inc (DHI), Medifast Inc (MED) and Copart, Inc. (CPRT).

The Keepers

7 stocks remain in the portfolio. They are: Oshkosh Corp (OSK), United Rentals, Inc. (URI), Bruker Corporation (BRKR), Meta Financial Group Inc. (CASH), Nk Lukoil Pao (Adr) (LUKOY), Onemain Holdings Inc (OMF) and Pennymac Financial Services Inc (PFSI).

The New Additions

We are adding 3 stocks to the portfolio. These include: Skechers Usa Inc (SKX), Foot Locker, Inc. (FL) and Criteo Sa (Adr) (CRTO).

Latest Changes

Additions  
SKECHERS USA INC SKX
FOOT LOCKER, INC. FL
CRITEO SA (ADR) CRTO
Deletions  
D. R. HORTON INC DHI
MEDIFAST INC MED
COPART, INC. CPRT

The Danger of Over-scrutinizing Investment Measures

The classic value measure price-to-book has long fallen out of favor with investors largely because companies are very different now than they were in the past. Companies have intangible assets, for example, which are not reflected in the ratio. This has been much-discussed in investing circles. But Validea's Jack Forehand warns that we may be spending too much time focused on P/B and not enough time looking at other popular measures and their possible weaknesses. He reminds us that it's important to evaluate your investing process.

No investing factor has been maligned more than the Price/Book in recent years. In a period where value in general has performed very poorly, the Price/Book has struggled more than any of the other common value factors. When you couple that with the fact that the Price/Book's failure to account for intangible assets makes its validity questionable in a world where more than 80% of assets are intangible, you have a perfect storm for investors challenging the long-term validity of the factor.

And when I say that investors have been questioning the Price/Book, I am not just referring to others. I am also referring to myself. I have talked often in my articles about the case against the Price/Book and why it may not work in the future like it has in the past.

But as we question the long-term validity of the Price/Book, I think all of us also need to dig a little deeper into why we are questioning it in the first place, and what it says about our own investing process.

Spreading Around the Scrutiny

I recently appeared on the Acquirer's Podcast with Tobias Carlisle , and during the interview, Toby asked me a question that really got me thinking. He asked me why we all always tend to question the long-term efficacy of a factor like Price/Book when it is out of favor. I think that is a really important question.

It is no coincidence that the value metric that everyone is questioning the most right now is the one that has performed the worst in the past decade. I haven't seen any articles challenging the PE Ratio. I have seen no takedowns of the Price/Sales. Everyone (myself included) loves EV/EBITDA so you don't see much talk about its weaknesses. Maybe it is because those are better metrics (and you can certainly argue that based on long-term data), but it is also important to keep in mind that all of us tend to spend much more time scrutinizing things that aren't working than things that are, and sometimes that can be a detriment to long-term performance.

Even return periods as long as a decade or more can have significant noise in them. The fact that the Price/Book has struggled in the most recent decade doesn't tell us that it no longer works. Even though it may deserve the extra scrutiny it has gotten, it might make sense to also take a look at the other value metrics to understand their weaknesses.

So to make up for all the time I have spent scrutinizing Price/Book, I thought it might be useful to pretend that each of the other value metrics had been the worst over the past decade and to come up with the arguments against them as well.

The Weaknesses of Popular Value Metrics

Here are some arguments against the most widely used value factors:

Price/Earnings - Earnings can be subject to manipulation and accounting gimmickry. Also, all the price-based metrics don't take debt into account like enterprise value based metrics do.

Price/Sales - How is it reasonable to evaluate a company without even considering if it makes money? Price/Sales treats a high margin company the same as a company that loses money. That doesn't seem to make much sense, especially in a technology dominated world where the separation between low margin and high margin firms seems to be widening.

Price/Cash Flow - Although non-cash expenses may not involve the transfer of cash, there is a reason they exist. Excluding them in some situations can lead to a less clear picture of a firm's business.

EV/EBITDA - Depreciation may be a non-cash expense, but assets require maintenance, and by adding it back this metric can favor asset -heavy companies over asset-light companies. Also, since this ratio can't really evaluate financials, you end up excluding an entire sector from your portfolio (this has obviously been a very good thing in the past decade, but may not be in the next).

So if any of these metrics had been the worst performer in the past decade like Price/Book has, I could look back in retrospect and make a case why it shouldn't be trusted. Some of these arguments are better than others and the argument against Price/Book may in fact be the strongest, but it is important to understand that no investment metric is perfect and all of the standard valuation metrics have their weaknesses. If any of the others were struggling as badly as Price/Book in the past decade, they might be seeing similar scrutiny.

And this idea doesn't just apply to value investing metrics. Low volatility investing has certainly been hot in recent years, and it has long-term evidence to support it. But if it struggles in the next decade, we will all be asking ourselves whether it was reasonable to expect to get the same or greater returns than the market while taking less risk. And there are many other examples of the same thing.

None of this is to suggest that the Price/Book doesn't deserve the scrutiny it gets or that is isn't flawed. It does and it is. But all investing metrics are flawed in some way and the fact that all of us tend to give extra scrutiny to things that are out of favor may lead us to miss flaws in other areas of our investment strategy that have been working well in the short-term. Being willing to scrutinize your investment strategy is a great thing. It just shouldn't always be poor performance that initiates the process.

New to the Hot List

Criteo SA (CRTO) - Shares of this French company specializing in digital performance marketing score highly on the investment models tracking the styles of Peter Lynch, Tobias Carlisle, and Kenneth Fisher.

Foot Locker (FL) - Shares of this athletic footwear and apparel retailer score highly on several guru models, including that of Patrick O'Shaughnessy, James O'Shaughnessy, Tobias Carlisle, and Peter Lynch.

Skechers (SKX) - Shares of this casual footwear maker score highly on the models tracking James O'Shaughnessy, Dashan Huang, Wesley Gray, Peter Lynch, and Kenneth Fisher.

News on Hot List Stocks

Bruker Corp. said it completed debt financing actions, including a new $600 million revolving credit and a $300 million term loan to fund corporate strategic objectives.

OneMain Financial named Adam Rosman general counsel, effective in January, succeeding John Anderson, who is retiring. In addition, the company said Jenny Osterhout would join as chief administrative officer in January.


Portfolio Holdings
Ticker Date Added Return
LUKOY 4/5/2019 9.1%
PFSI 8/23/2019 18.2%
FL 12/13/2019 TBD
OMF 8/23/2019 14.2%
BRKR 11/15/2019 0.2%
CASH 11/15/2019 6.0%
OSK 11/15/2019 3.1%
SKX 12/13/2019 TBD
URI 11/15/2019 5.7%
CRTO 12/13/2019 TBD


Guru Analysis
Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer

LUKOY  |   PFSI  |   FL  |   OMF  |   BRKR  |   CASH  |   OSK  |   SKX  |   URI  |   CRTO  |  

NK LUKOIL PAO (ADR)

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

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

The Cornerstone Value Strategy looks for large, well known companies whose market cap is greater than $1 billion. These companies exhibit solid and stable earnings. LUKOY's market cap of $69,293 million passes this test.


CASH FLOW PER SHARE: PASS

The second criterion requires that the company exhibit strong cash flows. Companies with strong cash flow are typically the value oriented investments that this strategy looks for. The company's cash flow per share must be greater than the mean of the market cash flow per share ($1.89). LUKOY's cash flow per share of $23.58 passes this test.


SHARES OUTSTANDING: PASS

This particular strategy looks for companies whose total number of outstanding shares are in excess of the market average (598 million shares). These are the more well known and highly traded companies. LUKOY, who has 668 million shares outstanding, passes this test.


TRAILING 12 MONTH SALES: PASS

A company's trailing 12 month sales ($127,098 million) are required to be 1.5 times greater than the mean of the market's trailing 12 month sales ($24,435 million). LUKOY passes this test.


DIVIDEND: PASS

The final step in the Cornerstone Value strategy is to select the 50 companies from the market leaders group (those that have passed the previous four criteria) that have the highest dividend yield. LUKOY, with a dividend yield of 5.60%, is one of the 50 companies that satisfy this last criterion.

PENNYMAC FINANCIAL SERVICES INC

Strategy: Growth Investor
Based on: Martin Zweig

PennyMac Financial Services, Inc. is a specialty financial services firm. The Company conducts business in three segments: production, servicing (together, production and servicing comprise its mortgage banking activities) and investment management. Production segment performs mortgage loan origination, acquisition and sale activities. Servicing segment performs mortgage loan servicing for its own account and for others, including for PennyMac Mortgage Investment Trust (PMT). Investment management segment represents its investment management activities, which include the activities associated with investment asset acquisitions and dispositions, such as sourcing, due diligence, negotiation and settlement; managing correspondent production activities for PMT; and managing the acquired investments for PMT. Its primary subsidiaries are: PNMAC Capital Management, LLC, PennyMac Loan Services, LLC and PNMAC Opportunity Fund Associates, LLC.


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. PFSI's P/E is 9.22, based on trailing 12 month earnings, while the current market PE is 21.00. 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. PFSI's revenue growth is 20.69%, while it's earnings growth rate is 46.19%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, PFSI 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 (83.9%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (59.5%) of the current year. Sales growth for the prior must be greater than the latter. For PFSI 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. PFSI's EPS ($1.51) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. PFSI's EPS for this quarter last year ($0.56) 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. PFSI's growth rate of 169.64% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: FAIL

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


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


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

If the growth rate of the prior three quarter's earnings, -37.97%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 169.64%, (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, 169.64% must be greater than or equal to the historical growth which is 46.19%. PFSI 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. PFSI, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.48, 0.62, 0.86, 3.48, and 2.59, fails this test.


LONG-TERM EPS GROWTH: PASS

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. PFSI's long-term growth rate of 46.19%, 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 PFSI, this criterion has not been met (insider sell transactions are 21, while insiders buying number 6). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.

FOOT LOCKER, INC.

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

Foot Locker, Inc. is a retailer of shoes and apparel. The Company operates through two segments: Athletic Stores and Direct-to-Customers. The Company is an athletic footwear and apparel retailer, which include businesses, such as include Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep and SIX:02. The Direct-to-Customers segment is multi-branded and sells directly to customers through Internet and mobile sites and catalogs. The Direct-to-Customers segment operates the Websites for eastbay.com, final-score.com, eastbayteamsales.com and sp24.com. Additionally, this segment includes the Websites, both desktop and mobile, aligned with the brand names of its store banners (footlocker.com, ladyfootlocker.com, six02.com kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu, runnerspoint.com and sidestep-shoes.com).


DETERMINE THE CLASSIFICATION:

According to this methodology, FL is a "Slow Grower", based on its single digit earnings growth of 6.49%, based on the average of the 3, 4 and 5 year historical eps growth rates.


SALES: PASS

FL would fall into the "Dividend Payers" category according to this methodology. The first requirement of a Slow Grower is that its sales exceed one billion. FL's sales are $8,056 million. It passes the test.


YIELD COMPARED TO THE S&P 500: PASS

This methodology also maintains that the Yield of a "Slow Grower" should be high, which includes being higher than the S&P average (currently 2.44%), and at least 3%. This yield is required because dividends are the main reason for investing in "Slow Growers". The yield for FL is 3.93% so it passes this test.


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

This methodology would consider the Yield-adjusted P/E/G ratio for FL of 0.81, based on the average of the 3, 4 and 5 year historical eps growth rates, to be good.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for FL (5.03%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for FL (9.72%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for FL (18.57%) 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.

ONEMAIN HOLDINGS INC

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

OneMain Holdings, Inc. is a financial services holding company. The Company is a consumer finance company, which is engaged in providing personal loan products; credit and non-credit insurance, and service loans owned by it and service or subservice loans owned by third-parties. The Company's segments include Consumer and Insurance; Acquisitions and Servicing; Real Estate, and Other. It is engaged in pursuing strategic acquisitions and dispositions of assets and businesses, including loan portfolios or other financial assets. The Company originates and services personal loans (secured and unsecured) through two business divisions: branch operations and centralized operations. As of December 31, 2016, its combined branch operations included over 1,800 branch offices in 44 states. It offers optional credit insurance products to its customers, including credit life insurance, credit disability insurance, credit involuntary unemployment insurance and collateral protection insurance.


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. OMF's profit margin of 16.47% passes this test.


RELATIVE STRENGTH: PASS

The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. OMF, with a relative strength of 92, satisfies this test.


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

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for OMF (66.97% for EPS, and 13.56% for Sales) are not good enough to pass.


INSIDER HOLDINGS: FAIL

OMF's insiders should own at least 10% (they own 2.80%) of the company's outstanding shares. This does not satisfy the minimum requirement, and companies that do not pass this criteria are less attractive.


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. OMF's free cash flow of $15.04 per share passes this test.


PROFIT MARGIN CONSISTENCY: FAIL

The profit margin in the past must be consistently increasing. The profit margin of OMF has been inconsistent in the past three years (Current year: 10.54%, Last year: 4.83%, Two years ago: 5.51%), which is unacceptable. This inconsistency will carryover directly to the company's bottom line, or earnings per share.


R&D AS A PERCENTAGE OF SALES: NEUTRAL

This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in OMF's case.


CASH AND CASH EQUIVALENTS: PASS

OMF has a large amount of cash $679.0 million on hand. Although this criteria does not apply to companies of this size, we define anything greater than $500 million in cash as having 'a lot of cash' to allow analysis of these companies. A company like OMF has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.


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

The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (OMF's is 0.23), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. OMF passes this test.

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

AVERAGE SHARES OUTSTANDING: PASS

OMF has not been significantly increasing the number of shares outstanding within recent years which is a good sign. OMF currently has 136.0 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: FAIL

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. OMF's sales of $4,627.0 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years.


DAILY DOLLAR VOLUME: PASS

OMF passes the Daily Dollar Volume (DDV of $23.0 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. OMF with a price of $43.54 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.


INCOME TAX PERCENTAGE: PASS

OMF's income tax paid expressed as a percentage of pretax income this year was (28.37%) and last year (38.75%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.

BRUKER CORPORATION

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

Bruker Corporation designs and manufactures scientific instruments, and analytical and diagnostic solutions. Its segments include the Bruker BioSpin Group; the Bruker Chemicals, Applied Markets, Life Science, In-Vitro Diagnostics, Detection (CALID) Group; the Bruker Nano Group, and the Bruker Energy & Supercon Technologies (BEST) Segment. The Bruker BioSpin Group segment designs, manufactures and distributes enabling life science tools. The Bruker CALID segment designs, manufactures and distributes life science mass spectrometry instruments that can be integrated and used along with other sample preparation or chromatography instruments, as well as chemical, biological, radiological, nuclear and explosive detection products. The Bruker Nano segment designs, manufactures and distributes spectroscopy and microscopy instruments. The BEST segment develops and manufactures superconducting and non-superconducting materials and devices. It also focuses on nanomechanical testing instruments.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (37.63) relative to the growth rate (25.93%), 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 BRKR (1.45) is on the high side, but is acceptable if all the other tests are met.


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. BRKR, whose sales are $2,026.3 million, needs to have a P/E below 40 to pass this criterion. BRKR's P/E of (37.63) 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 BRKR was 27.53% last year, while for this year it is 26.88%. Since inventory to sales has decreased from last year by -0.65%, BRKR 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 BRKR is 25.9%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for BRKR (61.38%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for BRKR 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 BRKR (2.12%) 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 BRKR (-2.54%) 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.

META FINANCIAL GROUP INC.

Strategy: Growth Investor
Based on: Martin Zweig

Meta Financial Group, Inc. is a unitary savings and loan holding company. The Company operates through its banking subsidiary, MetaBank (the Bank). Its segments include Payments, Banking, and Corporate Services/Other. MetaBank is both a community-oriented financial institution offering a range of financial services to meet the needs of the communities it serves and a payments company providing services on a nationwide basis. It operates in both the banking and payments industries through MetaBank, its retail banking operation; Meta Payment Systems (MPS), its electronic payments division; AFS/IBEX Financial Services Inc. (AFS/IBEX), its insurance premium financing division, and Refund Advantage, EPS Financial, LLC (EPS) Financial and Specialty Consumer Services, its tax-related financial solutions divisions. The Company, through its Meta Commercial Finance Division, which includes its state-chartered bank subsidiary, Crestmark Bank, provides business-to-business commercial financing.


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. CASH's P/E is 13.85, based on trailing 12 month earnings, while the current market PE is 21.00. 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. CASH's revenue growth is 51.98%, while it's earnings growth rate is 25.74%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, CASH 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 (34.3%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (139.4%) of the current year. Sales growth for the prior must be greater than the latter. For CASH 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. CASH's EPS ($0.53) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. CASH's EPS for this quarter last year ($0.12) 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. CASH's growth rate of 341.67% 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 CASH is 12.87%. This should be less than the growth rates for the 3 previous quarters which are 39.29%, -28.95% and 226.09%. CASH 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, 18.18%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 341.67%, (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, 341.67% must be greater than or equal to the historical growth which is 25.74%. CASH 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. CASH, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.89, 1.31, 1.62, 1.70 and 2.49, 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. CASH's long-term growth rate of 25.74%, 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 CASH, this criterion has not been met (insider sell transactions are 13, while insiders buying number 12). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.

OSHKOSH CORP

Strategy: Growth Investor
Based on: Martin Zweig

Oshkosh Corp is a designer, manufacturer and marketer of a broad range of engineered specialty vehicles and vehicle bodies. The Company operates through four segments: access equipment, defense, fire & emergency and commercial. Access equipment segment designs and manufactures aerial work platforms and telehandlers used in a wide variety of construction, industrial, institutional and general maintenance applications and also manufactures towing and recovery equipment in the United States. Defense segment manufactures heavy, medium, and light tactical wheeled vehicles. Fire & emergency segment designs and manufactures fire apparatus assembled on custom chassis, aircraft rescue and firefighting vehicles to domestic and international airports and broadcast and communication vehicles. Commercial segment designs and manufactures front- and rear-discharge concrete mixers and portable and stationary concrete batch plants, refuse collection vehicles and field service vehicles.


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. OSK's P/E is 11.28, based on trailing 12 month earnings, while the current market PE is 21.00. 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. OSK's revenue growth is 7.51%, while it's earnings growth rate is 29.90%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, OSK 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 (6.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (10%) of the current year. Sales growth for the prior must be greater than the latter. For OSK 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. OSK's EPS ($2.19) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. OSK's EPS for this quarter last year ($2.02) 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. OSK's growth rate of 8.42% 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 OSK is 14.95%. This should be less than the growth rates for the 3 previous quarters, which are 143.94%, 23.13%, and 34.16%. OSK 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, 47.71%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 8.42%, (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 OSK is 8.4%, and it would therefore fail this test.


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

The EPS growth rate for the current quarter, 8.42% must be greater than or equal to the historical growth which is 29.90%. Since this is not the case OSK would therefore fail 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. OSK, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.90, 2.91, 3.77, 6.15 and 8.31, 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. OSK's long-term growth rate of 29.90%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.


TOTAL DEBT/EQUITY RATIO: PASS

A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. OSK's Debt/Equity (31.50%) is not considered high relative to its industry (174.40%) and passes this test.


INSIDER TRANSACTIONS: PASS

A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For OSK, this criterion has not been met (insider sell transactions are 10, while insiders buying number 75). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.

SKECHERS USA INC

Strategy: Growth Investor
Based on: Martin Zweig

Skechers U.S.A., Inc. is a designer and marketer of Skechers-branded lifestyle footwear for men, women and children, and performance footwear for men and women under the Skechers Performance brand name. It also offers apparel, accessories, eyewear, scrubs and other merchandise. It sells its footwear in department, specialty and independent stores, as well as through its Skechers retail stores and online at skechers.com. The Company operates through three segments: domestic wholesale sales, international wholesale sales, and retail sales, which includes e-commerce sales. Its lifestyle brands include Skechers USA, Skechers Sport, and Skechers Active and Skechers Sport Active. Its Performance Brands include Skechers Performance, Skechers Kids and Skechers Work. As of December 31, 2017, the Company's products are available in over 170 countries and territories through its network of subsidiaries in Asia, Europe, Canada, Central America and South America.


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. SKX's P/E is 19.19, based on trailing 12 month earnings, while the current market PE is 21.00. 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. SKX's revenue growth is 17.38%, while it's earnings growth rate is 21.77%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, SKX 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 (15.1%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (10.9%) of the current year. Sales growth for the prior must be greater than the latter. For SKX 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. SKX's EPS ($0.67) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. SKX's EPS for this quarter last year ($0.56) 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. SKX's growth rate of 19.64% 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 SKX is 10.88%. This should be less than the growth rates for the 3 previous quarters which are 47.62%, 1.43% and 68.97%. SKX 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: FAIL

If the growth rate of the prior three quarter's earnings, 25.83%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 19.64%, (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 SKX is 19.6%, and it would therefore fail this test.


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

The EPS growth rate for the current quarter, 19.64% must be greater than or equal to the historical growth which is 21.77%. Since this is not the case SKX would therefore fail 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. SKX, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.91, 1.50, 1.57, 1.78 and 1.85, 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. SKX's long-term growth rate of 21.77%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.


TOTAL DEBT/EQUITY RATIO: PASS

A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. SKX's Debt/Equity (5.64%) is not considered high relative to its industry (37.30%) and passes this test.


INSIDER TRANSACTIONS: PASS

A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For SKX, this criterion has not been met (insider sell transactions are 14, while insiders buying number 9). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.

UNITED RENTALS, INC.

Strategy: Growth Investor
Based on: Martin Zweig

United Rentals, Inc. is a holding company. The Company is an equipment rental company, which operates throughout the United States and Canada. It operates through two segments: general rentals, and trench, power and pump. The general rentals segment includes the rental of construction, aerial, industrial and homeowner equipment and related services and activities. The trench, power and pump segment includes the rental of specialty construction products and related services. Its general rentals segment includes the rental of general construction and industrial equipment, such as backhoes, skid-steer loaders, forklifts and material handling equipment; aerial work platforms, such as boom lifts and scissor lifts, and general tools and light equipment, such as pressure washers, water pumps and power tools. As of October 17, 2018, it operated 1075 rental locations. It conducts its operations through its subsidiary, United Rentals (North America), Inc. (URNA) and subsidiaries of URNA.


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. URI's P/E is 11.18, based on trailing 12 month earnings, while the current market PE is 21.00. 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. URI's revenue growth is 10.18%, while it's earnings growth rate is 28.38%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, URI 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 (17.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (21.1%) of the current year. Sales growth for the prior must be greater than the latter. For URI 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. URI's EPS ($5.09) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. URI's EPS for this quarter last year ($4.00) 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. URI's growth rate of 27.25% 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 URI is 14.19%. This should be less than the growth rates for the 3 previous quarters which are 60.33%, 1.86% and 7.17%. URI 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, 22.24%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 27.25%, (versus the same quarter one year ago) then the stock passes.


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

The EPS growth rate for the current quarter, 27.25% must be greater than or equal to the historical growth which is 28.38%. Since this is not the case URI would therefore fail 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. URI, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 5.14, 6.07, 6.45, 7.68 and 13.19, 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. URI's long-term growth rate of 28.38%, 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. URI's Debt/Equity (319.56%) is considered high relative to its industry (244.31%) 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 URI, this criterion has not been met (insider sell transactions are 3, while insiders buying number 10). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.

CRITEO SA (ADR)

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

Criteo SA is a France-based company specializing in digital performance marketing. Its solution consists of the Criteo Engine, the Company's data assets, access to inventory, and its advertiser and publisher platforms. The Criteo Engine consists of various machine learning algorithms, such as prediction, recommendation, bidding and creative algorithms and the global hardware and software infrastructure. The Criteo Engine delivers advertisements through multiple marketing channels and formats, including display advertising banners, native advertising banners and marketing messages delivered to opt-in e-mail addresses. Advertisements are delivered on all devices and screens, including Web browsers on desktops and laptops, mobile Web browsers on smart phones and tablets, as well as mobile applications. It operates in approximately 90 countries through a network of over 30 international offices located in Europe, the Americas and the Asia-Pacific region.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (13.20) relative to the growth rate (47.11%), 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 CRTO (0.28) 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. CRTO, whose sales are $2,279.0 million, needs to have a P/E below 40 to pass this criterion. CRTO's P/E of (13.20) 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 CRTO is 47.1%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for CRTO (0.38%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for CRTO (11.61%) 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: BONUS PASS

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 CRTO (31.98%) is high enough to add to the attractiveness of this company.


Watch List

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

Ticker Company Name Current
Score
DHI D. R. HORTON INC 55%
HIBB HIBBETT SPORTS, INC. 54%
LPLA LPL FINANCIAL HOLDINGS INC 54%
MBT MOBIL'NYE TELESISTEMY PAO (ADR) 53%
ATKR ATKORE INTERNATIONAL GROUP INC 52%
EME EMCOR GROUP INC 51%
ESNT ESSENT GROUP LTD 49%
GGAL GRUPO FINANCIERO GALICIA S.A. (ADR) 49%
TX TERNIUM SA (ADR) 49%
UFPI UNIVERSAL FOREST PRODUCTS, INC. 48%



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.