Economy & Markets

Strong numbers on productivity and jobs can't shake the uneasy feeling as the stock market enters what is traditionally its worst month of the calendar year. Tech stocks have been slammed by fears the U.S. won't back off promises to slap more import tariffs on Chinese goods. Another harbinger of volatility: Insider stock sales reached their peak for the year in August, coinciding with recent all-time highs for the major indexes. Insider selling is sometimes a bearish sign for investors. The tech-heavy Nasdaq has fallen more than 2% this week alone and has notched several straight days of losses. Tech has been leading the market higher for the last year, with occasional hiccups such as now. The sector is seen as vulnerable to potential supply chain disruption if the trade war with China escalates. Tech and consumer stocks still lead the S&P, which is up 7.65% this year. The index trades at almost 25 times earnings. The Dow Jones Industrial Average, up 5.16% this year, trades at around 23.

Some positive numbers :

1. The Labor Department said U.S. productivity increased an annualized 2.9% in the second quarter following a tepid 0.3% in the first quarter.

2. The service sector boomed in August after factory orders sank more than expected in July. ISM's measure of the non-manufacturing sector for August was 58.5, beating expectations of 56.8. A reading above 50 indicates expansion.

3. Luxury home prices are falling at the highest end of the spectrum, according to RedFin, which said 12% of homes listed at $10 million or more had a price drop this year.

Some not-so-positive numbers :

1. Private companies added 163,000 jobs in August, down from 217,000 in July and well below Wall Street expectations despite a robust job market.

2. The U.S. trade deficit rose to a five month high in July as exports of soybeans and commercial aircraft fell and imports hit a record high, according to the Commerce Department.

3. A Northwestern Mutual survey of about 2,000 Americans found that one in 10 believe they will be in debt for the rest of their lives.

Recommended Reading

An article in Advisor Perspectives looked at a chapter about the business cycle in Jeremy Siegel's 1994 book "Stocks for the Long Run." Data from the book showed how the stock market tends to turn down before a recession hits and rises before it is over. But Siegel said there can also be false signals. Market declines that aren't followed by a recession are shorter-lasting and less severe than those that do. When the market is in decline, but the economic indicators are healthy, investors should stay invested and take the short-term pain that the market is dishing out, the article said. Read more here and check below for articles and blog posts you may have missed.

Value Way: Ben Graham's "The Intelligent Investor" still sells 100,000 copies a year as investors of all stripes look to learn the value-investing way. But as Warren Buffett once said, value investing is "is simple, but not easy." Read more

Active Competition: Barry Ritholtz argues that, despite the maturation in index investing and a slowdown in inflows to passive funds, "indexing is still giving active funds plenty of competition." Read more

Factor Fear: Last month, the FT published a lengthy piece on factor investing that discusses to what degree it poses a threat to the hedge fund industry. BlackRock's head of factor investing argues that lower costs has been the primary reason for the rise in the strategy. Read more

ETF Games: Deutsche Bank found that betting against the stocks ETFs buy at rebalancing time and buying the ones they sell leads to outperformance. The strategists, Bloomberg says, are treating their finding as a "new investment anomaly, a systematic way of profiting from errors in investor thinking." Read more

Rate Clues: The difference between the two-and ten-year Treasury yield, the so-called yield curve, is the narrowest since 2007, a recession signal, Bloomberg reports. Among the reasons for worry: trade wars, high stock valuations, politics, and rate hikes by the Fed. Read more

Value Ratings: The Globe and Mail ran an article that back-tested eight value ratios using the S&P 500 index. It found that the success of any particular value ratio varies over time, "a big reason why many quantitatively oriented investors use multiple factors when looking for promising stocks." Read more

Tech Values: The Harvard Business Review recently wrote about the need for financial statements to better capture the value of modern tech companies. Human capital is in short supply, for example, and risk-taking is desirable. Ideas are more important than near-term financials. Read more

Gundlach Views: Barron's recently interviewed DoubleLine's Jeffrey Gundlach, who says the U.S. is getting closer to a recession. The flattening yield curve is "flashing yellow," he said. Read more

FOMO Factor: Fear of being left behind is a powerful force among fund managers, even if it means taking big risks like investing in tech stocks with high valuations. In the first six months of this year, technology shares accounted for all of the S&P 500's gains, adding that "managers not invested in tech stocks should be polishing their resumes." Read more

Hedge Rebound: Bill Ackman's Pershing Square Holdings is up 20% since March and, through July 10th, up over 10% on the year after a humbling period of years that included big public losses, investor withdrawals and a failed activist campaign, according to Barron's. Read more

Option Date: Warren Buffett is facing the expiration of equity-index put options that the Berkshire Hathaway CEO initiated between 2004 and 2008 "to bet that stock prices would rise in the long run," Bloomberg reports. Read more

News on Hot List Stocks

Sanderson Farms reported earnings per share of 50 cents, trailing estimates. Net sales of $852 million also trailed the consensus as poultry product sales declined.

Signet shares rallied nearly 25% after the company reported strong second quarter 2019 results. Earnings per share of 52 cents were more than double expectations.

Hot List Performance Update

Since our last newsletter, the S&P 500 returned 0.7%, while the Hot List returned 1.6%. So far in 2015, the portfolio has returned -5.1% vs. 7.6% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 244.9% vs. the S&P's 187.7% gain.

The Dangers of Headline Investing

As investors, we have plenty of noise to deal with day in and day out. Among the most difficult to avoid are the headlines screaming out the latest investing ideas. Even though the evidence shows investing by the headlines isn't a great idea, there are plenty of distractions to steer investors to the wrong path.

Take the last two years. At this point in 2016, one thing the headlines were all saying was it was highly unlikely that Donald Trump would win the U.S. presidential election. And as the weeks headed into that November election, the conventional wisdom continued to hold. In fact, many saw Trump's seemingly impossible odds as a negative should he manage to beat them. No less than the pros at Bridgewater estimated a 10% drop in the stock market in that doomsday scenario.

The pundits had evaluated the situation as one of uncertainty. The market doesn't like upheaval. But investors had evaluated the situation differently. They looked at Trump's possible election as a play on deregulation and tax reform that would supercharge growth.

The people who went defensive and sold or held cash on the sidelines because the conventional wisdom told them to stand aside missed out on an incredible pop once the ballots were counted and Trump indeed turned out to be the winner.

So much for conventional wisdom.

People who wanted to time the market around the election had to have crystal ball telling them with certainty who would win and how markets would react. The conventional thinking at the time had both of them wrong. And that is the case for other periods when upheaval would suggest a market decline when the opposite occurred.

Would you believe the market actually slightly outperforms during war time? The CFA Institute looked at the data and found that large cap stocks rose 10% from 1926 to 2013 but during wars going back to WWII, large caps rose 11.4%. Small caps also had a slight advantage in war time, while supposedly "safer" long-term bonds performed worse during war periods. Unlike the conventional wisdom, war is not bad for stocks.

Are all political and social events positive for the market? No. But political turmoil in Washington is the highest it's been in a generation and the markets still continue to climb. The investors who have stuck with their plans and ignored the headlines have probably fared the best in this climate.

Trying to anticipate headlines and how the market will react to them is a little like trying to predict the news itself. Some topics come up at predictable times and you can plan around them. Most news, however, is not like that, and Trump adds an extra element of unpredictability in his social media habits and seemingly knee-jerk decisions on trade and other topics.

Political headlines aren't the only noise investors need to tune out. There are a lot of counterproductive words spilled around milestones like the anniversary of the longest bull run in the last century, which happened last month. Is hitting that milestone a signal to sell or is it a signal to stay put? Long-term, unlike conventional wisdom would suggest, market peaks are more often a positive for the market than a negative.

Investing on the headlines is akin to market timing, and there is plenty of evidence that shows that's a tricky and costly exercise. It's important to keep a wider perspective that directs the focus away from the day-to-day fluctuations in the markets and in individual stocks. Your process should be set up to eliminate the temptation to react rashly, recognizing that it is difficult to sort through the noise when the political atmosphere is so highly charged.

Perhaps it's time to return to a few basic questions: what is my philosophy? What values do I hold at my core? These can help keep that focus on the long-term, away from the headlines, and keep you firmly on the path to achieving your goals by sticking to your strategy even when times get tough.

At Validea we advise investors to follow proven strategies, trust facts, and beware of emotion.

Turning off the headlines and taking a broader perspective will keep you focused on what matters: a sound investment process.


Portfolio Holdings
Ticker Date Added Return
CACC 3/9/2018 30.5%
UFPI 8/24/2018 0.8%
UVE 8/24/2018 0.3%
DHI 8/24/2018 -0.4%
SCHN 6/29/2018 -20.8%
SIG 8/24/2018 3.8%
THO 8/24/2018 1.7%
ZAGG 8/24/2018 -6.9%
PATK 8/24/2018 3.0%
SAFM 4/6/2018 -7.4%


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

CACC   |   UFPI   |   UVE   |   DHI   |   SCHN   |   SIG   |   THO   |   ZAGG   |   PATK   |   SAFM   |  

CREDIT ACCEPTANCE CORP.

Strategy: Growth Investor
Based on: Martin Zweig

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


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. CACC's P/E is 13.34, based on trailing 12 month earnings, while the current market PE is 26.00. 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. CACC's revenue growth is 13.62%, while it's earnings growth rate is 30.32%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, CACC 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 (14.3%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (12.5%) of the current year. Sales growth for the prior must be greater than the latter. For CACC 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. CACC's EPS ($7.76) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. CACC's EPS for this quarter last year ($5.09) 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. CACC's growth rate of 52.46% 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 CACC is 15.16%. This should be less than the growth rates for the 3 previous quarters, which are 23.28%, 228.60%, and 30.72%. CACC 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, 92.67%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 52.46%, (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 CACC is 52.5%, 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, 52.46% must be greater than or equal to the historical growth which is 30.32%. CACC 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. CACC, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 10.54, 11.92, 14.28, 16.31 and 29.14, 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. CACC's long-term growth rate of 30.32%, 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 CACC, this criterion has not been met (insider sell transactions are 819, while insiders buying number 71). 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.

UNIVERSAL FOREST PRODUCTS, INC.

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

Universal Forest Products, Inc. is a holding company. The Company, through its subsidiaries, supplies wood, wood composite and other products to three primary markets, such as retail, construction and industrial. Its segments include North, South, West, Alternative Materials, International, idX Holdings, Inc. (idX) and Corporate divisions. idX is a designer, manufacturer and installer of in-store environments. It designs, manufactures and markets wood and wood-alternative products for national home centers and other retailers; structural lumber and other products for the manufactured housing industry; engineered wood components for residential and commercial construction; specialty wood packaging, components and packing materials for various industries, and customized interior fixtures used in a range of retail stores, commercial and other structures. Its customers comprising retail market are national home center retailers and retail-oriented regional lumberyards, among others.


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Smokestack (cyclical) companies with a Price/Sales ratio between .4 and .8 represent good values according to this methodology. UFPIpasses this test as its P/S of 0.53 based on trailing 12 month sales, falls within the "good values" range for cyclical companies.


TOTAL DEBT/EQUITY RATIO: PASS

Less debt equals less risk according to this methodology. UFPI's Debt/Equity of 30.06% is acceptable, thus passing the test.


PRICE/RESEARCH RATIO: PASS

This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. UFPI is neither a Technology nor Medical company. Therefore the Price/Research ratio is not available and, hence, not much emphasis should be placed on this particular variable.


PRELIMINARY GRADE: Some Interest in UFPI At this Point

Is UFPI a "Super Stock"? NO


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-Smokestack(non-cyclical) companies with a Price/Sales ratio between .75 and 1.5 are good values. Otherwise, Smokestack(cyclical) companies with a Price/Sales ratio between .4 and .8 represent good values. UFPI's P/S ratio of 0.53 falls within the "good values " range for cyclical industries and is considered attractive.


LONG-TERM EPS GROWTH RATE: PASS

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. UFPI's inflation adjusted EPS growth rate of 31.16% passes the test.


FREE CASH PER SHARE: PASS

This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. UFPI's free cash per share of 0.76 passes this criterion.


THREE YEAR AVERAGE NET PROFIT MARGIN: FAIL

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. UFPI, whose three year net profit margin averages 2.98%, fails this evaluation.

UNIVERSAL INSURANCE HOLDINGS, INC.

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

Universal Insurance Holdings, Inc. (UVE) is a private personal residential homeowners insurance company in Florida. The Company performs substantially all aspects of insurance underwriting, policy issuance, general administration, and claims processing and settlement internally. The Company's subsidiaries include Universal Property & Casualty Insurance Company (UPCIC) and American Platinum Property and Casualty Insurance Company (APPCIC). UPCIC writes homeowners insurance policies in states, including Alabama, Delaware, Florida, Georgia, Hawaii, Indiana, Maryland, Massachusetts, Michigan, Minnesota, North Carolina, Pennsylvania, South Carolina and Virginia. APPCIC writes homeowners and commercial residential insurance policies in Florida. The Company has developed a suite of applications that provide underwriting, policy and claim administration services, including billing, policy maintenance, inspections, refunds, commissions and data analysis.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (11.71) relative to the growth rate (22.50%), 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 UVE (0.52) makes it 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. UVE, whose sales are $792.8 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 UVE is 22.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

UVE 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. UVE's Equity/Assets ratio (29.00%) 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. UVE's ROA (8.98%) 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 UVE (5.23%) 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 UVE (12.28%) 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.

D. R. HORTON INC

Strategy: Growth Investor
Based on: Martin Zweig

D.R. Horton, Inc. is a homebuilding company. The Company constructed and sold homes in 27 states and 79 markets, as of September 30, 2015. The Company's segments include its 39 homebuilding divisions, its financial services operations and its other business activities. In the homebuilding segment, the Company builds and sells single-family detached homes and attached homes, such as town homes, duplexes, triplexes and condominiums. The Company's 39 homebuilding divisions are aggregated into six segments: East Region, South Central Region, Midwest Region, West Region, Southwest Region and Southeast Region. In the financial services segment, the Company sells mortgages and collects fees for title insurance agency and closing services. The Company has subsidiaries that conduct insurance-related operations; construct and own income-producing rental properties; own non-residential real estate, including ranch land and improvements, and own and operate oil and gas-related assets.


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. DHI's P/E is 12.10, based on trailing 12 month earnings, while the current market PE is 26.00. 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. DHI's revenue growth is 23.13%, while it's earnings growth rate is 14.69%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, DHI passes this criterion.


SALES GROWTH RATE: PASS

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (17.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (16.7%) of the current year. Sales growth for the prior must be greater than the latter. For DHI 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. DHI's EPS ($1.18) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. DHI's EPS for this quarter last year ($0.76) 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. DHI's growth rate of 55.26% 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 DHI is 7.34%. This should be less than the growth rates for the 3 previous quarters, which are 9.33%, 41.82%, and 51.67%. DHI 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, 32.11%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 55.26%, (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, 55.26% must be greater than or equal to the historical growth which is 14.69%. DHI 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. DHI, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.27, 1.46, 2.03, 2.36 and 2.74, passes this test.


LONG-TERM EPS GROWTH: FAIL

The final important criterion in this approach is that Earnings Growth be at least 15% per year. DHI's long-term growth rate of 14.69%, based on the average of the 3, 4 and 5 year historical eps growth rates, fails the minimum required.


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. DHI's Debt/Equity (35.98%) is not considered high relative to its industry (53.62%) 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 DHI, this criterion has not been met (insider sell transactions are 130, while insiders buying number 80). 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.

SCHNITZER STEEL INDUSTRIES, INC.

Strategy: Book/Market Investor
Based on: Joseph Piotroski

Schnitzer Steel Industries, Inc. is a recycler of ferrous and nonferrous scrap metal, including end-of-life vehicles, and a manufacturer of finished steel products. The Company operates through two segments: the Auto and Metals Recycling (AMR) business and the Steel Manufacturing Business (SMB). The AMR segment collects and recycles auto bodies, rail cars, home appliances, industrial machinery, manufacturing scrap and construction and demolition scrap from bridges, buildings and other infrastructure. AMR's primary products include recycled ferrous and nonferrous scrap metal. The SMB segment produces finished steel products such as rebar, wire rod, coiled rebar, merchant bar and other specialty products using 100% recycled metal sourced from AMR. SMB's products are primarily used in nonresidential and infrastructure construction in North America. SMB operates a steel mini-mill in McMinnville, Oregon that produces finished steel products using recycled metal and other raw materials.


BOOK/MARKET RATIO: PASS

The first criteria of this strategy requires that a company be in the top 20% of the market based on the Book/Market ratio (which is the inverse of the Price/Book ratio). SCHN, which has a book to market ratio of 0.85, meets this criterion and thus this strategy will use the following rules to determine if it is a financially distressed firm or is unfairly trading at a discount to its book value.

The study conducted by Piotroski found that excess returns can be earned by holding a portfolio of high Book/Market stocks. He also found, however, that it is very important to separate companies that trade at a discount because they are financially distressed from companies that are unfairly trading at a discount. The following criteria are used to help provide this distinction.


RETURN ON ASSETS: PASS

As a first step to determining whether a firm is not financially distressed, this methodology requires that the return on assets for the most recent fiscal year be positive. SCHN's return on assets was 4.59% in the most recent year, therefore it passes this test.


CHANGE IN RETURN ON ASSETS: PASS

The next requirement is that the return on assets for the most recent fiscal year must be greater than the return on assets for the previous fiscal year. SCHN's return on assets was 4.59% in the most recent year and -1.97% in the previous year, therefore it passes this test.


CASH FLOW FROM OPERATIONS: PASS

In addition to the return on assets, the cash flow from operations for the most recent fiscal year must also be positive. This eliminates companies that are burning cash and therefore are more likely to be financially distressed. SCHN's cash flow from operations was $100.37 million in the most recent year, therefore it passes this test.


CASH COMPARED TO NET INCOME: PASS

This methodology requires that cash from operations for the most current fiscal year must be greater than net income for the most current fiscal year. SCHN's cash from operations was $100.37 million in the most recent year, while its net income was $42.98 million, therefore it passes this test.


CHANGE IN LONG TERM DEBT/ASSETS: PASS

The long term debt to assets ratio for the most recent fiscal year must be less than or equal to the previous fiscal year. SCHN's LTD/Assets was 0.15 in the most recent year and 0.21 in the previous year, therefore it passes this test.


CHANGE IN CURRENT RATIO: FAIL

As an additional test of firm solvency, the current ratio for the most recent fiscal year must be greater than the current ratio for the previous fiscal year. SCHN's current ratio was 1.92 in the most recent year and 2.24 in the previous year, therefore it fails this test.


CHANGE IN SHARES OUTSTANDING: FAIL

The issuance of new stock is considered by this methodology to be a sign that a company is not able to generate enough internal cash to fund its business. Therefore, shares outstanding for the most recent fiscal year must be less than or equal to shares outstanding for the previous fiscal year. SCHN's shares outstanding was 26.9 million in the most recent year and 26.5 million in the previous year, therefore it fails this test.


CHANGE IN GROSS MARGIN: FAIL

As a sign that a company is expanding its profitability, this strategy requires that gross margin for the most recent fiscal year be greater than gross margin for the previous fiscal year. SCHN's gross margin was 13.00% in the most recent year and 13.00% in the previous year, therefore it fails this test.


CHANGE IN ASSET TURNOVER: PASS

The final criterion of this strategy requires that asset turnover for the most recent fiscal year be greater than asset turnover for the previous fiscal year. SCHN's asset turnover was 1.81 in the most recent year and 1.52 in the previous year, therefore it passes this test.

SIGNET JEWELERS LTD.

Strategy: Value Investor
Based on: Benjamin Graham

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.


SECTOR: PASS

SIG 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. SIG's sales of $6,330.2 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. SIG's current ratio of 3.04 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 SIG is $679.7 million, while the net current assets are $2,257.9 million. SIG passes this test.


LONG-TERM EPS GROWTH: PASS

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 10 years. We have data for 7 years, and have adjusted this requirement to be a 21% gain over the 7 year period. Companies with this type of growth tend to be financially secure and have proven themselves over time. SIG's EPS growth over that period of 122.7% passes the EPS growth test.


P/E RATIO: PASS

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. SIG's P/E of 10.90 (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. SIG's Price/Book ratio is 2.00, while the P/E is 10.90. SIG passes the Price/Book test.

THOR INDUSTRIES, INC.

Strategy: Growth Investor
Based on: Martin Zweig

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).


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. THO's P/E is 10.47, based on trailing 12 month earnings, while the current market PE is 26.00. 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. THO's revenue growth is 23.83%, while it's earnings growth rate is 27.41%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, THO 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 (11.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (24.1%) of the current year. Sales growth for the prior must be greater than the latter. For THO 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. THO's EPS ($2.53) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. THO's EPS for this quarter last year ($2.11) pass this test.


POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS

The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. THO's growth rate of 19.91% 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 THO is 13.71%. This should be less than the growth rates for the 3 previous quarters, which are 43.95%, 63.09%, and 56.10%. THO 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, 54.08%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 19.91%, (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 THO is 19.9%, 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, 19.91% must be greater than or equal to the historical growth which is 27.41%. Since this is not the case THO 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. THO, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.86, 3.29, 3.79, 4.91 and 7.09, 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. THO's long-term growth rate of 27.41%, 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. THO's Debt/Equity (4.29%) is not considered high relative to its industry (20.02%) 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 THO, this criterion has not been met (insider sell transactions are 204, while insiders buying number 22). 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.

ZAGG INC

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

ZAGG Inc (ZAGG) designs, produces and distributes professional product solutions for mobile devices, including screen protection (glass and film), keyboards for tablet computers and mobile devices, keyboard cases, earbuds, mobile power solutions, cables, and cases under the ZAGG and InvisibleShield brands. In addition, the Company designs, produces and distributes earbuds, headphones, mobile power solutions, Bluetooth speakers, cases and cables for mobile devices under the iFrogz brand in the fashion and youth oriented lifestyle sector. The Company designs product solutions for users of mobile devices, and sells these products to consumers through global distribution partners and online. The Company offers products for various market segments of handheld electronic devices, including smartphones, tablets, notebook computers, laptops, gaming devices, global positioning system (GPS) devices, watch faces, and similar devices and surfaces. Its other brands include mophie and BRAVEN.


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratio between .75 and 1.5 are good values. ZAGG's P/S ratio of 0.80 based on trailing 12 month sales, falls within the "good values" range for non-cyclical companies and is considered attractive.


TOTAL DEBT/EQUITY RATIO: PASS

Less debt equals less risk according to this methodology. ZAGG's Debt/Equity of 14.54% is acceptable, thus passing the test.


PRICE/RESEARCH RATIO: PASS

This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. ZAGG is neither a Technology nor Medical company. Therefore the Price/Research ratio is not available and, hence, not much emphasis should be placed on this particular variable.


PRELIMINARY GRADE: Some Interest in ZAGG At this Point

Is ZAGG a "Super Stock"? NO


PRICE/SALES RATIO: FAIL

The prospective company should have a low Price/Sales ratio. To be considered a "Super Stock", non-cyclical (non-Smokestack) companies should have Price/Sales ratios below .75. However, ZAGG, who has a P/S of 0.80, does not fall within the "Super Stock" range. It does fall between 0.75 and 1.5, which is considered the "good values" range for non-cyclical companies. Nonetheless, it does not pass this "Super Stock" criterion.


LONG-TERM EPS GROWTH RATE: PASS

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. ZAGG's inflation adjusted EPS growth rate of 36.64% passes the test.


FREE CASH PER SHARE: PASS

This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. ZAGG's free cash per share of 1.00 passes this criterion.


THREE YEAR AVERAGE NET PROFIT MARGIN: FAIL

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. ZAGG, whose three year net profit margin averages 1.61%, fails this evaluation.

PATRICK INDUSTRIES, INC.

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

Patrick Industries, Inc. is a manufacturer of component products and distributor of building products and materials for the recreational vehicle (RV) and manufactured housing (MH) industrial markets for customers throughout the United States and Canada. In addition, it is a supplier to certain other industrial markets, such as kitchen cabinet, office and household furniture, fixtures and commercial furnishings, marine, and other industrial markets. The Company's segments include Manufacturing and Distribution. It manufactures a range of products, which include decorative vinyl and paper laminated panels, solid surface, granite and quartz countertops, fabricated aluminum products, wrapped vinyl, paper and hardwood profile mouldings, slide-out trim and fascia, cabinet doors and components, hardwood furniture, fiberglass and plastic component products including front and rear caps and marine helms, interior passage doors, RV painting, and slotwall panels and components, among others.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (15.56) relative to the growth rate (30.46%), 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 PATK (0.51) 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. PATK, whose sales are $2,039.8 million, needs to have a P/E below 40 to pass this criterion. PATK's P/E of (15.56) 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 PATK was 9.82% last year, while for this year it is 10.72%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (0.89%) is below 5%.


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 PATK is 30.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: FAIL

PATK's Debt/Equity (144.33%) is above 80% and is considered very weak. Therefore, PATK fails this test.


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 PATK (4.81%) 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 PATK (-35.13%) 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.

SANDERSON FARMS, INC.

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

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.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (17.09) relative to the growth rate (21.64%), 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 SAFM (0.79) 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. SAFM, whose sales are $3,357.8 million, needs to have a P/E below 40 to pass this criterion. SAFM's P/E of (17.09) 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 SAFM was 7.82% last year, while for this year it is 7.56%. Since inventory to sales has decreased from last year by -0.26%, SAFM 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 SAFM is 21.6%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for SAFM (0.00%) to be wonderfully 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 SAFM (8.31%) 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 SAFM (17.34%) 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.


Watch List

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

Ticker Company Name Current
Score
TUSK MAMMOTH ENERGY SERVICES INC 65%
AVAV AEROVIRONMENT, INC. 59%
ESNT ESSENT GROUP LTD 52%
MGA MAGNA INTERNATIONAL INC. (USA) 47%
MMS MAXIMUS, INC. 43%
APPF APPFOLIO INC 43%
UTHR UNITED THERAPEUTICS CORPORATION 42%
HAS HASBRO, INC. 37%
EGBN EAGLE BANCORP, INC. 37%
CFG CITIZENS FINANCIAL GROUP INC 37%



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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.