With talk of tax reform in the air, the stock markets continued their march into the stratosphere. The Dow Jones industrial average is up 18.6 percent this year through Wednesday, and the Standard & Poor's 500 is up 15.2 percent. They are now trading at a forward earnings multiple of 17.6 and 18, respectively. But while the indexes continue to gain, sectors are showing signs of strain. Within the S&P 500, half of the sectors are down over one month. Information technology continued to lead, up 7 over one month, followed by utilities (up 3.25 percent) and materials (up 2.8 percent). Telecommunications is a laggard, down more than 6 percent in the last month.

Some positive numbers:

1. The Labor Department's weekly jobless claims came in around 229,000, which is down from the prior week and lower than expectations.
2. Private sector jobs reported by ADP rose more than expected because of a surge in construction after Hurricanes Harvey and Irma.
3. The Federal Reserve left interest rates at its target 1 percent to 1.25 percent range but expectations are that it will raise them by the end of the year.
4. S&P's CoreLogic Case-Shiller home price index rose 6.1 percent annually, beating expectations.
5. Consumer spending rose 1 percent in September, the largest jump since August 2009, the Commerce Department said.

Some not-so-positive numbers:

1. The market's Shiller CAPE ratio, which looks at stock prices relative to their earnings over a 10-year period, is above 31, about where it was in 1996 when Alan Greenspan spoke of "irrational exuberance."
2. Oil prices continue to inch higher, topping $54 a barrel as U.S. hits all-time peak production, boosted by shale drilling.
3. Non-manufacturing economic activity eased in October after two months of gains. The ISM's index was 58.7, down from 59.8 in September, which had been the highest since 2005.
4. The bond market is flashing a recession warning sign in the form of a flattening yield curve, the difference in rates between the 2-year and 10-year note.


Recommended reading

What might normally seem like warning signs might not be as ominous as people think. Historically low volatility coupled with high market valuations may be a reflection that strong corporate earnings and global economic expansion are going to be the trends for the next several quarters and that traders aren't worried the bottom is about to drop out. Finding value in this type of market might take a little more work but there the fundamental approach to evaluating stock picks hasn't gone out of style.

Low volatility safety net: Much has been said about the remarkably low "fear gauge," or CBOE Volatility Index despite chaos in Washington and growing geopolitical uncertainty. But Barron's recent noted low volatility is a good thing for investors because it signals low expectations for a big change in the near future. Read more

High CAPE fear: The cyclically adjusted price-earnings ratio, which is over 30 at the moment, well above historic averages. Reason would say things will revert to average at some point, but Bloomberg said deviations from the CAPE's mean don't necessarily say anything about expected market returns. Read more

Small cap upswing: Ben Carlson of Ritholtz Wealth Management notes in a Blooomberg column that small cap stocks have finally decided to join the party. Read more

Value will return: Growth stocks are all anyone can think about these days, but the Financial Post says there's reason enough to believe value stocks will come back in favor eventually. "Over the long term, buying value and ignoring the shiny, well-liked stocks has paid off." Read more

Bull market to stay: Bob Doll, Nuveen's chief equity strategist, says this bull market has legs to stand in a recent Barron's piece. Investor confidence is bolstered by strong earnings and economies are expanding globally, meaning there is plenty of support for continued stock market gains. Read more

Active or passive?: Here's an online debate between Bloomberg columnist Nir Kaissar and Ritholtz Wealth Management's Barry Ritholtz on the pros and cons of active versus passive management. Read more

Momentum on a roll: Buying stocks that are rising the fastest and selling them when they lose steam has been a popular strategy lately, but InvestmentNews writes that momentum investing has its risks. Read more

Market cap strategies: Market caps in and of themselves generally aren't used as a sole investment criteria when selecting stocks, but they can be coupled with other factors to identify investment opportunities. Here are a few examples from Validea's quantitative models. Read more

Performance Update

Since our last newsletter, the S&P 500 returned 0.7%, while the Hot List returned -3.1%. So far in 2016, the portfolio has returned 21.2% vs. 15.2% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 275.2% vs. the S&P's 157.9% gain.

News on Hot List stocks

Thor Industries (THO) - Its travel trailer making unit, Airstream, is opening a research and development center at its manufacturing plant in Jackson Center, Ohio

IPG Photonics (IPGP) - The company is spending $30 million on a larger facility including a new automated plant line and 150 additional jobs as the result of growth in its mirror making facility. EPS beat the consensus estimate.

ManpowerGroup (MAN) - The global recruiting and job placement firm declared a 93 cent a share dividend payable on December 15 to shareholders as of Dec. 1.

Credit Acceptance Corp. (CACC) - Third quarter profit at the auto finance company was $5.19, which beat the consensus estimate by 19 cents on revenue of $283.9 million.

NIC (EGOV) - Profit of 21 cents a share beat the consensus by 3 cents. The provider of government online services said revenue was $84.5 million.

The Dangers of Expecting the Past to Repeat Itself

It's natural to commemorate big anniversaries and look back at historic events and compare them to where things stand in the present day. We recently marked the 30th anniversary of Black Monday, aptly named for one of the darkest days in the U.S. stock market. Among the many lessons learned from Oct. 19, 1987, was that markets are more intertwined than we think and often react violently in times of stress. Trades that were supposed to hedge or offset risk actually worked against investors during a market disruption.

It seems obvious now looking back, but markets have short-term memories. Just 10 years after Black Monday, the market was contending with a massive mortgage crisis that caught banks will billions of toxic bonds they created and kept on their books, practically bringing down the global financial system.

And then there's the tendency for everyone to chase the same idea. Lately, market watchers have wondered whether the conditions resemble the late 1990s tech-stock driven market bubble. Valuations are extremely high, with the Dow's multiple touching 18. The gains have been driven almost entirely by the technology giants Apple, Amazon, Facebook, Netflix and Google's Alphabet as investors pin their hopes on growth stocks to continue to deliver.

These so-called FANG stocks are the modern equivalent of Knute Rockne's seemingly unstoppable four horsemen of Notre Dame: they have dominant brands and disruptive ideas that are mowing down all the competition.

One of them could become the first trillion-dollar company before long. And because they are so big, their movements have an outside influence on the direction of the market-cap weighted indexes. This is what some have pointed to as a sign that things are about to turn for the worse. Surely even the FANG stocks will have to take a breather.

Take a look at a key market barometer called the Shiller CAPE ratio, named after the Nobel prize winning economist Robert Shiller. It looks at earnings relative to stock prices over 10 years. Currently it's reading above 30, the highest it's been since the late 1990s. Even the more traditional PE ratio is near peaks it hasn't seen since the early 2000s. Both then and now, large cap stocks led the markets higher and smaller cap - which are generally more growth oriented companies - lagged behind.

This would all point to a market correction around the corner, as was the case in the late 1990s. But there are signs things are different this time.

Another indicator is showing the current markets as fairly valued. That is the ratio of earnings yield to bond yields. Basically bond yields are so low right now that stocks still look attractive, even at current valuations. And if you believe bond market gurus like former Federal Reserve Chairman Alan Greenspan, the bubble is in the bond market, not in stocks.

Another big difference between then and now is the type of company dominating the market. Where the dotcom boom icons derived their market vales from expectations of sales growth (earnings be damned), the current FANGs are big companies with both revenue and profit, strong cash flow and established management. The high growth companies that haven't achieved profitability yet aren't going public as early or often these days. And the companies that have sold their first public shares lately, Blue Apron and Snap come to mind, learned the punishing lesson that investors are skeptical of unproven ideas.

A third difference is market sentiment. The late 1990s was characterized by a teenage-like giddiness and a belief the market simply could not fall. Everyone wanted in on the market. Even taxi drivers were day trading in between fares. There was a euphoria that is lacking today. Stock ownership is down after investors got burned during the 2008 financial crisis. Young people are far less apt to sign up for online brokerage accounts they manage on their own. The percentage of Americans owning stocks now is 54 percent, according to Gallup, down from 62% in the era from 2001 to 2008.

What conclusions can be drawn from all of this? Validea co-founder Jack Forehand recently wrote this:

"Ultimately, I think every market is different. The 90s bull market is similar to this one in that they both lasted a long time, the returns were significant, and valuations were high. But the euphoria of that market, both when it comes to individual investors and professionals, was completely different. Many stocks that led the run in the 90s did not have sustainable business models, and the stocks leading the market higher today are some of the most successful companies in the world.

Assuming any market will play out exactly like any past market is just setting yourself up for failure. This bull market could end tomorrow or it could go on for years. No one really knows and you should be very wary of anyone who tells you that they do. But I think learning from the past is something we all should do, as long as the past is put in the proper context. As a factor-based investor who focuses on value and small-caps, I certainly wouldn't mind if this bull market ends like the prior one, since small-cap value stocks basically didn't go down at all in the bear market that followed, while the S&P 500 went down 40%. But I am also smart enough to know that, just like a lot of other things about the market, I can't predict that. That may be the biggest lesson learned from any part of market history, including the late 90s."

The point being we can never be sure whether the market is following historical trends or veering off in a new direction, making it difficult to say one strategy is better than another in navigating tricky situations. Even the model portfolios we have built at Validea, tracking the strategies of leading investors, come in and out of favor over time. For investors the best plan is to discover the strategies that fit their risk appetite and goals and not be fickle about it. Investing is a long-term enterprise, and markets will rise and fall along the way.

Portfolio Holdings
Ticker Date Added Return
SAFM 11/18/2016 81.2%
THO 10/20/2017 3.5%
ESNT 8/25/2017 10.7%
AGX 5/5/2017 -1.9%
BMA 7/1/2016 61.6%
MGA 6/2/2017 19.1%
CTB 9/22/2017 -8.3%
SIG 10/20/2017 0.7%
JP 10/20/2017 -20.7%
MNST 9/22/2017 2.9%


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

SAFM   |   THO   |   ESNT   |   AGX   |   BMA   |   MGA   |   CTB   |   SIG   |   JP   |   MNST   |  

SANDERSON FARMS, INC.

Strategy: Contrarian Investor
Based on: David Dreman

Sanderson Farms, Inc. is a poultry processing company. The Company is engaged in the production, processing, marketing and distribution of fresh and frozen chicken, and also preparation, processing, marketing and distribution of processed and minimally prepared chicken. 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, casual dining operators, customers reselling frozen chicken into export markets. The Company, through its subsidiaries, Sanderson Farms, Inc. (Production Division) and Sanderson Farms, Inc. (Processing Division), conducts its chicken operations. Sanderson Farms, Inc. (Production Division) is engaged in the production of chickens to the broiler-stage. Sanderson Farms, Inc. (Foods Division) is engaged in the processing, sale and distribution of chickens. The Company, through Sanderson Farms, Inc. (Foods Division), conducts its prepared chicken business.

MARKET CAP: PASS

Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. SAFM has a market cap of $3,339 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. SAFM's EPS for the past 2 quarters, (from earliest to most recent quarter) 2.98, 5.09 have been increasing, and therefore the company passes this test.


EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: PASS

This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. SAFM passes this test as its EPS growth rate over the past 6 months (399.01%) has beaten that of the S&P (6.03%). SAFM's estimated EPS growth for the current year is (51.37%), which indicates the company is expected to experience positive earnings growth. As a result, SAFM passes this test.


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


P/E RATIO: PASS

The P/E of a company should be in the bottom 20% of the overall market. SAFM's P/E of 11.78, based on trailing 12 month earnings, meets the bottom 20% criterion (below 13.57), and therefore passes this test.


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

The P/CF of a company should be in the bottom 20% of the overall market. SAFM's P/CF of 8.83 does not meet the bottom 20% criterion (below 7.39), and therefore fails this test.


PRICE/BOOK (P/B) VALUE: FAIL

The P/B value of a company should be in the bottom 20% of the overall market. SAFM's P/B is currently 2.40, which does not meet the bottom 20% criterion (below 1.09), and it therefore fails this test.


PRICE/DIVIDEND (P/D) RATIO: FAIL

The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). SAFM's P/D of 114.94 does not meet the bottom 20% criterion (below 20.62), and it therefore fails this test.


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


CURRENT RATIO: PASS

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.11] or greater than 2). This is one identifier of financially strong companies, according to this methodology. SAFM's current ratio of 3.91 passes the test.


PAYOUT RATIO: FAIL

A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for SAFM is 15.94%, while its historical payout ratio has been 13.62%. Therefore, it fails the payout criterion.


RETURN ON EQUITY: PASS

The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 17.15%, and would consider anything over 27% to be staggering. The ROE for SAFM of 21.96% is high enough to pass this criterion.


PRE-TAX PROFIT MARGINS: PASS

This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. SAFM's pre-tax profit margin is 13.42%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. SAFM's current yield is 0.87%, while the market yield is 2.55%. SAFM fails this test.


LOOK AT THE TOTAL DEBT/EQUITY: PASS

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

THOR INDUSTRIES, INC.

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

Thor Industries, Inc. manufactures a range of recreational vehicles (RVs) in the United States and sells those vehicles primarily in the United States and Canada. The Company's segments include towable recreational vehicles, which consists of the operations of Airstream, Inc. (Airstream) (towable); Heartland Recreational Vehicles, LLC (Heartland) (including Bison Coach, LLC (Bison), Cruiser RV, LLC (CRV) and DRV, LLC (DRV)); Jayco, Corp. (Jayco) (including Jayco towable, Starcraft and Highland Ridge), Keystone RV Company (Keystone) (including CrossRoads and Dutchmen) and K.Z., Inc. (KZ) (including Livin' Lite RV, Inc. (Livin' Lite)); motorized recreational vehicles, which consists of the operations of Airstream (motorized), Jayco (including Jayco motorized and Entegra Coach) and Thor Motor Coach, Inc. (Thor Motor Coach), and Other, which includes the operations of its subsidiary, Postle Operating, LLC (Postle).


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (19.28) relative to the growth rate (27.41%), 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 THO (0.70) makes it 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. THO, whose sales are $7,247.0 million, needs to have a P/E below 40 to pass this criterion. THO's P/E of (19.28) 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 THO was 8.81% last year, while for this year it is 6.35%. Since inventory to sales has decreased from last year by -2.46%, THO 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 THO is 27.4%, 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 THO (9.20%) 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 THO (3.25%) 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 THO (1.08%) 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.

ESSENT GROUP LTD

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

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


DETERMINE THE CLASSIFICATION:

ESNT is considered a "Stalwart", according to this methodology, for its earnings growth of 19.60%. This is based on based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, which lies within a moderate 10%-19% range. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. However, ESNT is not considered a "True Stalwart" for its sales of $513 million are less than the multi-billion dollar level.


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

The Yield-adjusted P/E/G ratio for ESNT (0.77), based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, is O.K.


EARNINGS PER SHARE: PASS

The EPS for a stalwart company must be positive. ESNT's EPS ($2.81) would satisfy this criterion.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

ESNT is a financial company so debt to equity rules are not applied to determine the company's financial soundness.


EQUITY/ASSETS RATIO: PASS

This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. ESNT's Equity/Assets ratio (70.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion.


RETURN ON ASSETS: PASS

This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. ESNT's ROA (13.70%) is above the minimum 1% that this methodology looks for, thus passing the criterion.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for ESNT (6.89%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for ESNT (-3.68%) 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.

ARGAN, INC.

Strategy: Growth Investor
Based on: Martin Zweig

Argan, Inc. is a holding company. The Company conducts operations through its subsidiaries, Gemma Power Systems, LLC and affiliates (GPS), Atlantic Projects Company Limited (APC), Southern Maryland Cable, Inc. (SMC) and The Roberts Company (Roberts). Through GPS and APC, the Company's power industry services segment provides engineering, procurement, construction, commissioning, operations management, maintenance, development, technical and consulting services to the power generation and renewable energy markets. Through SMC, the telecommunications infrastructure services segment of the Company provides project management, construction, installation and maintenance services to commercial, local government and federal government customers. Through Roberts, the Company's industrial fabrication and field services segment produces, delivers and installs fabricated steel components specializing in pressure vessels and heat exchangers for industrial plants.


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. AGX's P/E is 12.45, 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. AGX's revenue growth is 34.86%, while it's earnings growth rate is 32.48%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, AGX 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 (59.9%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (76.8%) of the current year. Sales growth for the prior must be greater than the latter. For AGX 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. AGX's EPS ($1.72) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. AGX's EPS for this quarter last year ($1.29) 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. AGX's growth rate of 33.33% 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 AGX is 16.24%. This should be less than the growth rates for the 3 previous quarters, which are 61.11%, 182.22%, and 61.73%. AGX passes this test, which means that it has good, reasonably steady earnings.


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


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

If the growth rate of the prior three quarter's earnings, 88.89%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 33.33%, (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 AGX is 33.3%, and it would therefore pass this test.


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

The EPS growth rate for the current quarter, 33.33% must be greater than or equal to the historical growth which is 32.48%. AGX 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. AGX, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.65, 2.78, 2.05, 2.42, and 4.50, 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. AGX's long-term growth rate of 32.48%, 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. AGX's Debt/Equity (0.00%) is not considered high relative to its industry (52.28%) 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 AGX, this criterion has not been met (insider sell transactions are 272, while insiders buying number 69). 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.

BANCO MACRO SA (ADR)

Strategy: Contrarian Investor
Based on: David Dreman

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

MARKET CAP: PASS

Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. BMA has a market cap of $8,028 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. BMA's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.16, 1.57 have been increasing, and therefore the company passes this test.


EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: PASS

This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. BMA passes this test as its EPS growth rate over the past 6 months (823.52%) has beaten that of the S&P (6.03%). BMA's estimated EPS growth for the current year is (1,217.46%), which indicates the company is expected to experience positive earnings growth. As a result, BMA passes this test.


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


P/E RATIO: FAIL

The P/E of a company should be in the bottom 20% of the overall market. BMA's P/E of 18.39, based on trailing 12 month earnings, is higher than the bottom 20% criterion (below 13.57), and therefore fails this test.


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

The P/CF of a company should be in the bottom 20% of the overall market. BMA's P/CF of 18.54 does not meet the bottom 20% criterion (below 7.39), and therefore fails this test.


PRICE/BOOK (P/B) VALUE: FAIL

The P/B value of a company should be in the bottom 20% of the overall market. BMA's P/B is currently 3.87, which does not meet the bottom 20% criterion (below 1.09), and it therefore fails this test.


PRICE/DIVIDEND (P/D) RATIO: FAIL

The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). BMA's P/D of 80.00 does not meet the bottom 20% criterion (below 20.62), and it therefore fails this test.


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


PAYOUT RATIO: PASS

A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for BMA is 8.39%, while its historical payout ratio has been 10.61%. Therefore, it passes the payout criterion.


RETURN ON EQUITY: PASS

The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 17.15%, and would consider anything over 27% to be staggering. The ROE for BMA of 26.03% is high enough to pass this criterion.


PRE-TAX PROFIT MARGINS: PASS

This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. BMA's pre-tax profit margin is 40.42%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. BMA's current yield is 1.25%, while the market yield is 2.55%. BMA fails this test.

MAGNA INTERNATIONAL INC. (USA)

Strategy: Contrarian Investor
Based on: David Dreman

Magna International Inc. (Magna) is a global automotive supplier. The Company's segments are North America, Europe, Asia, Rest of World, and Corporate and Other. The Company's product capabilities include producing body, chassis, exterior, seating, powertrain, electronic, active driver assistance, vision, closure, and roof systems and modules, as well as vehicle engineering and contract manufacturing. The Company has over 320 manufacturing operations and approximately 100 product development, engineering and sales centers in over 30 countries. It provides a range of body, chassis and engineering solutions to its original equipment manufacturer (OEM) customers. It has capabilities in powertrain design, development, testing and manufacturing. It offers bumper fascia systems, exterior trim and modular systems. It offers exterior and interior mirror systems. It offers sealing, trim, engineered glass and module systems. It offers softtops, retractable hardtops, modular tops and hardtops.

MARKET CAP: PASS

Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. MGA has a market cap of $20,143 million, therefore passing the test.


EARNINGS TREND: FAIL

A company should show a rising trend in the reported earnings for the most recent quarters. MGA's EPS for the latest quarter is not greater than the prior quarter, (from earliest to most recent quarter) 1.53, 1.48. Hence the stock fails this test, but the investor should evaluate this company qualitatively to see if it qualifies under this methodology's "exception rule".


EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: PASS

This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. MGA passes this test as its EPS growth rate over the past 6 months (19.35%) has beaten that of the S&P (6.03%). MGA's estimated EPS growth for the current year is (14.15%), which indicates the company is expected to experience positive earnings growth. As a result, MGA passes this test.


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


P/E RATIO: PASS

The P/E of a company should be in the bottom 20% of the overall market. MGA's P/E of 9.97, based on trailing 12 month earnings, meets the bottom 20% criterion (below 13.57), and therefore passes this test.


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

The P/CF of a company should be in the bottom 20% of the overall market. MGA's P/CF of 6.14 meets the bottom 20% criterion (below 7.39) and therefore passes this test.


PRICE/BOOK (P/B) VALUE: FAIL

The P/B value of a company should be in the bottom 20% of the overall market. MGA's P/B is currently 1.92, which does not meet the bottom 20% criterion (below 1.09), and it therefore fails this test.


PRICE/DIVIDEND (P/D) RATIO: FAIL

The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). MGA's P/D of 50.25 does not meet the bottom 20% criterion (below 20.62), and it therefore fails this test.


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


CURRENT RATIO: FAIL

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.50] or greater than 2). This is one identifier of financially strong companies, according to this methodology. MGA's current ratio of 1.20 fails the test.


PAYOUT RATIO: PASS

A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for MGA is 18.75%, while its historical payout ratio has been 24.61%. Therefore, it passes the payout criterion.


RETURN ON EQUITY: PASS

The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 17.15%, and would consider anything over 27% to be staggering. The ROE for MGA of 20.99% is high enough to pass this criterion.


PRE-TAX PROFIT MARGINS: FAIL

This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. MGA's pre-tax profit margin is 7.82%, thus failing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. MGA's current yield is 1.99%, while the market yield is 2.55%. MGA fails this test.


LOOK AT THE TOTAL DEBT/EQUITY: PASS

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 124.22%. MGA's Total Debt/Equity of 31.96% is considered acceptable.

COOPER TIRE & RUBBER CO

Strategy: Value Investor
Based on: Benjamin Graham

Cooper Tire & Rubber Company is a manufacturer and marketer of replacement tires. The Company specializes in the design, manufacture, marketing and sales of passenger car, light truck, medium truck, motorcycle, and racing tires. The Company operates through four segments: North America, Latin America, Europe, and Asia. The North America segment comprises its operations in the United States and Canada. The Americas Tire Operations segment manufactures and markets passenger car and light truck tires, for sale in the United States replacement markets. The Latin America segment comprises its operations in Mexico, Central America, and South America. The European segment has operations in the United Kingdom and the Republic of Serbia. Its the United Kingdom entity manufactures and markets passenger car, light truck, motorcycle and racing tires and tire retread material. As of December 31, 2016, the Company operated nine manufacturing facilities and 20 distribution centers in 10 countries.


SECTOR: PASS

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


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $1 billion. CTB's sales of $2,881.5 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: PASS

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. CTB's current ratio of 2.67 passes the test.


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

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for CTB is $296.1 million, while the net current assets are $885.3 million. CTB passes this test.


LONG-TERM EPS GROWTH: FAIL

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 10 years. EPS for CTB were negative within the last 10 years and therefore the company fails this criterion.


P/E RATIO: PASS

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. CTB's P/E of 8.40 (using the 3 year PE) passes this test.


PRICE/BOOK RATIO: PASS

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. CTB's Price/Book ratio is 1.43, while the P/E is 8.40. CTB passes the Price/Book test.

SIGNET JEWELERS LTD.

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

Signet Jewelers Limited is a retailer of diamond jewelry. The Company's segments include the Sterling Jewelers division; the Zale division, which consists of the Zale Jewelry and Piercing Pagoda segments; the UK Jewelry division, and Other. The Sterling Jewelers division's stores operate in the United States principally as Kay Jewelers (Kay), Kay Jewelers Outlet, Jared The Galleria Of Jewelry (Jared) and Jared Vault. The Zale division operates jewelry stores (Zale Jewelry) and kiosks (Piercing Pagoda), located primarily in shopping malls across the United States, Canada and Puerto Rico. Zale Jewelry includes the United States store brand, Zales, and the Canadian store brand, Peoples Jewellers. Piercing Pagoda operates through mall-based kiosks. The UK Jewelry division operates stores in the United Kingdom, Republic of Ireland and Channel Islands. The Other segment includes the operations of subsidiaries involved in the purchasing and conversion of rough diamonds to polished stones.


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. SIG, with a market cap of $4,014 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. SIG, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 4.35, 4.56, 4.75, 5.87 and 6.93, 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. SIG's Price/Sales ratio of 0.64, 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. SIG has a relative strength of 22. 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.

JUPAI HOLDINGS LTD (ADR)

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

Jupai Holdings Limited (Jupai), formerly Jupai Investment Group, is a Cayman Islands-based third-party wealth management service provider. The Company focuses on distributing wealth management products and providing advisory services to individuals in People's Republic of China (PRC) who have investable assets in excess of three million Renminbi (RMB). It also sources products from third parties. Its product choices include fixed income products, private equity and venture capital funds, public market products and other products, such as insurance products and tailored alternative investments. It also provides asset management services in the management and advisory of real estate or related funds, other fund products and funds of funds. Its client base consists of entrepreneurs, corporate executives, professionals and other investors. It has a network of client centers in approximately 18 cities in the regions of the Bohai Rim, the Yangtze River Delta and the Pearl River Delta.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (14.48) relative to the growth rate (33.88%), 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 JP (0.43) is very favorable.


SALES AND P/E RATIO: NEUTRAL

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. JP, whose sales are $222.7 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate.


EPS GROWTH RATE: PASS

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for JP is 33.9%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

JP 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. JP's Equity/Assets ratio (72.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion.


RETURN ON ASSETS: PASS

This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. JP's ROA (18.84%) 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 JP (0.80%) 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 JP (3.54%) 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.

MONSTER BEVERAGE CORP

Strategy: Patient Investor
Based on: Warren Buffett

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

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 0.25, 0.18, 0.37, 0.38, 0.51, 0.62, 0.65, 0.92, 0.95, 1.19. Buffett would consider MNST's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 9 years ago. The dips have totaled 28.0%. MNST's long term historical EPS growth rate is 19.4%, 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. MNST 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 MNST, over the last ten years, is 28.5%, 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 33.4%, 23.0%, 33.3%, 24.5%, 27.3%, 47.8%, 32.8%, 30.7%, 12.0%, 20.2%, 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 MNST, over the last ten years, is 28.5% 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 33.4%, 23.0%, 33.3%, 24.5%, 27.3%, 47.8%, 32.8%, 30.7%, 12.0%, 20.2%, 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. MNST's free cash flow per share of $1.00 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 $6.02 and compares it to the gain in EPS over the same period of $0.94. MNST's management has proven it can earn shareholders a 15.6% 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: NEUTRAL

Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. MNST's shares outstanding have not fallen in either the current year or the last 3 or 5 years and so it fails this criterion. This is a bonus criterion and will not adversely affect the ability of a stock to pass the strategy as a whole if it is failed.

The preceding concludes Buffett's qualitative analysis. If and when he gets positive responses to all the above criteria, he would then proceed with a price analysis. The price analysis will determine whether or not the stock should be bought. The following is how he would evaluate MNST 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 $1.32 and divide it by the current market price of $57.45. An investor, purchasing MNST, could expect to receive a 2.30% initial rate of return. Furthermore, he or she could expect the rate to increase 19.4% 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 MNST's initial yield of 2.30%, which will expand at an annual rate of 19.4%, 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]

MNST currently has a book value of $6.65. It is safe to say that if MNST can preserve its average rate of return on equity of 21.0% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 21.0% and it will have a book value of $44.57 in ten years. If it can still earn 21.0% on equity in ten years, then expected EPS will be $9.34.


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

Now take the expected future EPS of $9.34 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (43.5) (5 year average P/E in this case), which is 39.3 and you get MNST's projected future stock price of $367.48.


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 $367.48. These numbers indicate that one could expect to make a 20.4% average annual return on MNST's stock at the present time. Buffett would consider this a great return.


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

If you take the EPS growth of 19.4%, based on the average of the 3, 4 and 5 year historical eps growth rates, you can project EPS in ten years to be $7.79. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (43.5) (5 year average P/E in this case), which is 39.3. This equals the future stock price of $306.32. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $306.32.


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 $57.45 and the future expected stock price, including the dividend pool, of $306.32. If you were to invest in MNST at this time, you could expect a 18.22% 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 18.2% and 20.4%. 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 19.3% on MNST 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 Current
Score
LGIH LGI HOMES INC 72%
SLF SUN LIFE FINANCIAL INC 62%
GILD GILEAD SCIENCES, INC. 58%
AEIS ADVANCED ENERGY INDUSTRIES, INC. 54%
MAN MANPOWERGROUP INC. 53%
UFPI UNIVERSAL FOREST PRODUCTS, INC. 52%
CVS CVS HEALTH CORP 47%
FB FACEBOOK INC 47%
UTHR UNITED THERAPEUTICS CORPORATION 45%
SKX SKECHERS USA INC 44%



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