The Economy

While the S&P 500 has continued to push back toward its May 2015 high, recent economic data has been disappointing, with weak numbers coming out of the industrial, retail, and housing sectors.

Industrial production slid by 0.6% in March, according to a new Federal Reserve report -- the second straight month that it has fallen by that amount. And, unlike some recent months, it wasn't just a result of commodity declines and weather factors pushing mining and utility output lower; manufacturing also fell, declining 0.3%.

Retail and food service sales dipped 0.3% in March, meanwhile, according to a new report from the Census Bureau. A significant drop in auto sales was a big reason behind the decline. Compared to the year-ago period, retail and food service sales were up a solid 3.6% year-over-year, however, one of the better annual increases we've seen in quite some time.

More weak data came from the housing sector. Housing starts fell nearly 9% in March, according to the Census Bureau, but are still more than 11% above year-ago levels. Permit issuance for new construction fell 7.7%, but is about 8% above where it stood a year ago.

After a couple months in which core inflation (which strips out volatile food and energy prices) rose more than it has in some time, the increase tapered off in March, with the core Consumer Price Index rising just 0.1%. Overall inflation came in at the same pace. Compared to a year ago, prices are just 0.9% higher; core prices are 2.2% higher.

While the inflation data remains fairly tame, oil and gas prices are continuing to rebound. Oil prices are moving into the mid-$40 per barrel level, while a gallon of regular unleaded on average cost $2.11 on April 20, up from $1.98 a month earlier, according to AAA. That's still about 14% below where it was a year ago.

Since our last newsletter, the S&P 500 returned 2.4%, while the Hot List returned 4.4%. So far in 2016, the portfolio has returned 4.8% vs. 2.3% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 195.4% vs. the S&P's 109.1% gain.

Portfolio Update: Big Winners

The Hot List has fared well over the past two weeks, extending its year-to-date and the long-term leads over the S&P 500. While five of the portfolio's holdings were in the black and five in the red since our last newsletter, the five winners each gained at least 4.7%, and the five losers lost no more than 3.5% (performance figures here and below as of Thursday morning trading).

Leading the way: Banco Macro (BMA), the Argentina-based bank. Shares have soared more than 20% since our last newsletter, thanks in large part to a US Court of Appeals decision that allows Argentina to proceed with a $15 billion bond sale to pay off holdout creditors from a 2001 default, according to Bloomberg. The decision ends more than a decade of litigation that prevented Argentina from participating in international credit markets. The Argentine peso and Argentine bank stocks jumped after the news that the country can go ahead with the bond sale, the proceeds of which will be used to pay the holdout creditors, pay past due interest to restructured bondholders and fund infrastructure projects in Argentina, Bloomberg stated.

Another strong performer was jewelry and accessory maker Fossil Inc. (FOSL), which was up more than 8%. There didn't seem to be a stock-specific catalyst for the gains. But Fossil shares have been pretty volatile over the past five months or so, and the recent gains came after a five-week stretch in which they were down 25%. The recent rebound may have been the result of investors realizing shares had fallen too far. The company has a 23% return on equity, nice margins, and a sub-10 P/E, so my models see a good deal of value in it.

HP Inc. (HPQ) rose nearly 6%. Its shares were up despite news that its global personal computer shipments fell by 10.8% year over year in the first quarter, TheStreet.com reported. US PC shipments fell 14.1%, and HP's US market share fell to 25.3% (from 27.7% a year earlier). That meant Dell took over the US PC market share lead from HP. Still, HP has strong profit margins and a high return on equity compared to its industry average, and it is dirt cheap, trading for just 6 times earnings. My models think it has more room to run.

On the down side, our worst performer since our last newsletter has been Valero Energy (VLO), which was down 3.5%. The recent rebounded in oil prices may be impacting the refiner, since its input costs are directly related to the price of oil. Still, Valero looks like a standout in the oil and gas operations industry. Its long-term earnings growth rate is 24% compared to the industry average of 0%; its return on equity is 19% compared to the average of -24%; and it trades for 7.6 times earnings, compared to 13.3 for the industry.

The Hot List's 2016 performance has been very encouraging. In two weeks, we will perform our regularly scheduled rebalancing, at which time we will sell any holdings whose relative scores have fallen significantly and replace them with new stocks that score highly on my models.

Recommended Reading

Company performance and stock price performance don't always go hand and hand. In a very good recent article, Morgan Housel, economics and finance columnist for The Motley Fool, said that's one reason that predicting the future for stocks is harder than most people think.

The performance of stocks is a function of future fundamentals (i.e. earnings and growth), but also "performance within the context of expectations," Housel writes. Predicting future performance of a company is one thing, but predicting the impact of that performance on a stock requires one to judge whether or not "current expectations are reasonable" and "what will future expectations be." Judging current expectations might be achievable, says Housel, although even that is difficult -- in most cases investors side with what is taking place in the here and now (i.e. the consensus view) in the market. Housel quotes well-known value investor Howard Marks to drive home this point: "The problem is that extraordinary performance comes only from correct nonconsensual forecasts, but nonconsensual forecasts are hard to make, hard to make correctly, and hard to act on."

Forecasting future expectations, Housel says, is even harder because you have to be able to predict correctly what the mindset and attitude of investors will be in the future. Trying to know how investors will be feeling five years from now seems impossible, especially given that investors could by that time be worried or concerned about what the market faces five years from then. "The more precise we try to forecast, the more we rely on predicting emotions and expectations," Housel says. "In a world where analysts focus most of their time analyzing performance -- what earnings will do, or what the economy will do -- it's no wonder we struggle to predict outcomes."

I highly recommend you check out the full piece.



Guru Spotlight: Peter Lynch On What Investors Can Learn From The Maya

As soon as the dust settled from Lehman Brothers' collapse and financial markets stabilized in 2009, pundits and investors were all on the lookout for the other shoe to drop. Any negative economic report was seen as "the beginning of the end". Whispers were everywhere about double-dip recessions. Investors saw bubbles everywhere -- even though most assets had been hit so hard that they were trading at bargain values.

It's not surprising. Few people saw the housing bubble -- which triggered the bank woes and Great Recession -- coming, so investors and talking heads were blindsided. And no one likes to be blindsided. When we are, our defenses go up and we do everything we can to avoid, or at least brace ourselves for, a repeat. A driver who has been rear-ended a couple times might start to obsessively check the rearview mirror. He might tense up anytime he has to come to a stop with someone behind him, even if the car behind him is keeping a safe distance. After the financial crisis, investors were obsessively checking their rearview mirrors, seeing dangers that were no longer present. Wells Capital Management's James Paulsen called it "post-traumatic-armageddon-hypochondria," and it was understandable, given how severe the pain of late 2008/early 2009 was.

But there's a lesson here, and it's not a new one. In fact, mutual fund legend Peter Lynch pointed it out a couple decades before the Great Recession. In his One Up on Wall Street, which is the basis of my Lynch-inspired Guru Strategy stock-picking model, Lynch talked about human beings' penchant for "penultimate preparedness" -- that is, the tendency to plan for the crisis we've just been through (and which is unlikely to repeat). Here's an excerpt from his discussion of this phenomenon:

Taken from One Up on Wall Street (Penguin Books, 1989)


Screen shot 2014-11-13 at 6.15.05 PM

Screen shot 2014-11-13 at 6.20.05 PM



In investing, there's a huge cost to penultimate preparedness. Just ask those who have been preparing for the second coming of the 08-09 crisis, or the second dip in the double-dip recession that so many people feared was coming. They have missed out on one of the longest, strongest bull markets of our lifetimes, one that has lasted more than seven years and included gains of more than 200% for the S&P 500.

To be clear, the mistake that these investors made wasn't trying to be prepared; structuring your portfolio so that it can hold up in tough times is certainly a good thing to do. The problem comes when you start making decisions that are based on fear, not facts. In early 2009, equities by just about any standard were cheap. Later in the year, improvement in the US economy was evident, and, while there have been a few ups and downs, the economy has continued to improve ever since then.

The penultimate preparers ignored those facts, however, failing to realize that the conditions that caused the 08-09 crisis had changed markedly. By piling into bonds or cash, they let their fears dictate the amount of risk they took. That is something that gurus like Lynch and Warren Buffett never did. They focused on cold, hard facts and figures, digging into balance sheets and fundamentals as they assessed companies' financial strength and valuation and growth prospects. By keeping their emotions in check and focusing on the facts, they were able to beat the market over long stretches. If you want to do the same, you'll have to demonstrate a similar type of levelheaded discipline while managing your own portfolio.



News about Validea Hot List Stocks

Western Digital Corporation (WDC): Western Digital announced that it has joined three key media and entertainment industry technical organizations. As an active member of the Society of Motion Picture and Television Engineers, the Entertainment Technology Center at the University of Southern California, and the Hollywood Professional Association, the firm will help drive object storage and other essential cloud storage technologies for a broad range of production-focused environments. Western Digital will provide technical education to these organizations and share advanced cloud-based storage methodologies and forward-looking delivery approaches for data-heavy media content.

The Next Issue

In two weeks, we will publish another issue of the Hot List, at which time we will rebalance the portfolio. If you have any questions, please feel free to contact us at hotlist@validea.com.

Portfolio Holdings
Ticker Date Added Return
THO 2/12/2016 26.7%
WDC 4/8/2016 0.6%
VLO 3/11/2016 -7.2%
FL 4/8/2016 -2.3%
WD 3/11/2016 -8.2%
WDR 3/11/2016 -10.4%
FOSL 4/8/2016 9.5%
BMA 11/20/2015 4.8%
CALM 11/20/2015 -11.6%
HPQ 3/11/2016 7.6%


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

THO   |   WDC   |   VLO   |   FL   |   WD   |   WDR   |   FOSL   |   BMA   |   CALM   |   HPQ   |  

THOR INDUSTRIES, INC.

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

Thor Industries, Inc. (Thor), manufactures and sells various recreational vehicles (RV) throughout the United States and Canada, as well as related parts and accessories. The principal types of The Company's towable recreational vehicles that the Company produces include conventional travel trailers and fifth wheels. In addition, it also produces truck and folding campers and equestrian, and other specialty towable recreational vehicles, as well as Class A, Class C and Class B motorhomes. The Company operates through two segments: towable recreational vehicles and motorized recreational vehicles. The Company through its operating subsidiaries manufactures recreational vehicles in North America. The subsidiaries are Airstream, Inc., CrossRoads RV, Thor Motor Coach, Inc., Keystone RV Company, Heartland Recreational Vehicles, LLC, Livin' Lite RV, Inc., Bison Coach, K.Z., Inc. and Postle Operating, LLC.


DETERMINE THE CLASSIFICATION:

THO is considered a "True Stalwart", according to this methodology, as its earnings growth of 19.29% lies within a moderate 10%-19% range and its annual sales of $4,238 million are greater than the multi billion dollar level. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. THO is attractive if THO can hold its own during a recession.


INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for THO was 6.14% last year, while for this year it is 6.14%. Since inventory to sales has not changed appreciably, THO passes this test.


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

The Yield-adjusted P/E/G ratio for THO (0.69), based on the average of the 3, 4 and 5 year historical eps growth rates, is O.K.


EARNINGS PER SHARE: PASS

The EPS for a stalwart company must be positive. THO's EPS ($4.32) would satisfy this criterion.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for THO (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 THO (4.42%) 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 (5.51%) 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.

WESTERN DIGITAL CORP

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

Western Digital Corporation, is a data storage solutions company. The Company is a developer, manufacturer and provider of data storage solutions that enable consumers, businesses, governments and other organizations to create, manage, experience and preserve digital content. The Company's Technology product includes: Hard Disk Drives and Solid-State Drives. Hard Disk Drives, provide non-volatile data storage. Solid-State Drives, are semiconductor and non-volatile media. The Company offers solutions including: Enterprise Storage Solutions, Client Desktop and Notebook PCs, Branded Product Solutions, Consumer Electronics Solutions. The Company's products are marketed under the HGST, WD and G-Technology brand names.


DETERMINE THE CLASSIFICATION:

According to this methodology, WDC is a "Slow Grower", based on its single digit earnings growth of 5.93%, based on the average of the 3, 4 and 5 year historical eps growth rates.


SALES: PASS

WDC would fall into the "Dividend Payers" category according to this methodology. The first requirement of a Slow Grower is that its sales exceed one billion. WDC's sales are $13,418 million. It passes the test.


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 WDC was 8.10% last year, while for this year it is 9.39%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (1.28%) is below 5%.


YIELD COMPARED TO THE S&P 500: PASS

This methodology also maintains that the Yield of a "Slow Grower" should be high, which includes being higher than the S&P average (currently 2.40%), and at least 3%. This yield is required because dividends are the main reason for investing in "Slow Growers". The yield for WDC is 4.61% so it passes this test.


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

This methodology would consider the Yield-adjusted P/E/G ratio for WDC of 0.85, based on the average of the 3, 4 and 5 year historical eps growth rates, to be good.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for WDC (26.21%) to be acceptable (equity is three to ten times debt). This ratio is one quick way to determine the financial strength of the company.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for WDC (12.02%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: BONUS PASS

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for WDC (31.78%) is high enough to add to the attractiveness of this company.

VALERO ENERGY CORPORATION

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

Valero Energy Corp (Valero) is an international manufacturer and marketer of transportation fuels, other petrochemical products and power. The Company's refineries can produce conventional gasolines, premium gasolines, gasoline, diesel fuel, low-sulfur diesel fuel, ultra-low-sulfur diesel fuel, CARB diesel fuel, other distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products. The Company markets branded and unbranded refined products through approximately 7,400 outlets. The Company also owns 11 ethanol plants in the central plains region of the United States that primarily produce ethanol. The Company operates through two segments. The refining segment includes refining operations, wholesale marketing, product supply and distribution, and transportation operations in the United States, Canada, the United Kingdom, Aruba and Ireland. Its ethanol segment primarily includes sale of internally produced ethanol and distillers grains.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (7.67) relative to the growth rate (23.73%), 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 VLO (0.32) is very favorable.


SALES AND P/E RATIO: PASS

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. VLO, whose sales are $87,804.0 million, needs to have a P/E below 40 to pass this criterion. VLO's P/E of (7.67) 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 VLO was 5.06% last year, while for this year it is 6.72%. 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 (1.66%) 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 VLO is 23.7%, 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 VLO (35.94%) to be normal (equity is approximately twice debt).


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 VLO (10.37%) 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 VLO (-10.73%) 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.

FOOT LOCKER, INC.

Strategy: Contrarian Investor
Based on: David Dreman

Foot Locker, Inc. is a retailer of shoes and apparel. The Company operates in two segments: Athletic Stores and Direct-to-Customers. The Athletic Stores segment is an athletic footwear and apparel retailer whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction and SIX:02, as well as the retail stores of Runners Point Group, including Runners Point and Sidestep. The Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and the direct-to-customer subsidiary of Runners Point Group, which sell to customers through their Internet and mobile sites and catalogs. As of January 31, 2015, the Company operated 3,423 primarily mall-based stores in the United States, Canada, Europe, Australia and New Zealand. As of January 31, 2015, the Company operated a total of 78 franchised stores, of which 31 are in the Middle East, 27 in Germany and Switzerland, and 20 in the Republic of Korea.

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. FL has a market cap of $8,228 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. FL's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.57, 1.14 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. FL passes this test as its EPS growth rate over the past 6 months (35.71%) has beaten that of the S&P (-3.16%). FL's estimated EPS growth for the current year is (24.22%), which indicates the company is expected to experience positive earnings growth. As a result, FL passes this test.


This methodology would utilize four separate criteria to determine if FL 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. FL's P/E of 15.74, based on trailing 12 month earnings, is higher than the bottom 20% criterion (below 11.97), 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. FL's P/CF of 11.94 does not meet the bottom 20% criterion (below 6.82), 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. FL's P/B is currently 3.24, which does not meet the bottom 20% criterion (below 0.92), 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%). FL's P/D of 54.95 does not meet the bottom 20% criterion (below 19.05), 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 [2.57] or greater than 2). This is one identifier of financially strong companies, according to this methodology. FL's current ratio of 3.72 passes the test.


PAYOUT RATIO: PASS

A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for FL is 25.69%, while its historical payout ratio has been 28.29%. 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 16.24%, and would consider anything over 27% to be staggering. The ROE for FL of 21.43% 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. FL's pre-tax profit margin is 11.29%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. FL's current yield is 1.82%, while the market yield is 2.72%. FL 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 62.82%. FL's Total Debt/Equity of 5.09% is considered acceptable.

WALKER & DUNLOP, INC.

Strategy: Contrarian Investor
Based on: David Dreman

Walker & Dunlop, Inc. (Walker & Dunlop) is a holding company, which conducts all of its operations through Walker & Dunlop, LLC, its operating company. Walker & Dunlop is a provider of commercial real estate financial services in the United States, with a primary focus on multifamily lending. The Company originates, sells, and services a range of multifamily and other commercial real estate financing products, including Multifamily Finance, Federal Housing Administration Finance, Capital Markets, and Proprietary Capital. It originates and sells loans through the programs of the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac, and together with Fannie Mae, the government-sponsored enterprises), the Government National Mortgage Association (Ginnie Mae) and the Federal Housing Administration, a division of the United States Department of Housing and Urban Development (together with Ginnie Mae, HUD).

MARKET CAP: FAIL

Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. WD has a market cap of $699 million, therefore failing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. WD's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.66, 0.67 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. WD passes this test as its EPS growth rate over the past 6 months (0.00%) has beaten that of the S&P (-3.16%). WD's estimated EPS growth for the current year is (0.75%), which indicates the company is expected to experience positive earnings growth. As a result, WD passes this test.


This methodology would utilize four separate criteria to determine if WD 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. WD's P/E of 8.50, based on trailing 12 month earnings, meets the bottom 20% criterion (below 11.97), 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. WD's P/CF of 3.87 meets the bottom 20% criterion (below 6.82) 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. WD's P/B is currently 1.36, which does not meet the bottom 20% criterion (below 0.92), 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%). WD's P/D is not available, and hence an opinion cannot be rendered at this time.


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


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 WD is 0.00%. Unfortunately, its historical payout ratio is not available. Nonetheless it passes the payout criterion, as this is a very low payout.


RETURN ON EQUITY: 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 16.24%, and would consider anything over 27% to be staggering. The ROE for WD of 17.83% 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. WD's pre-tax profit margin is 28.91%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. WD's current yield is not available (or one is not paid) at the present time, while the market yield is 2.72%. Hence, this criterion cannot be evaluated.

WADDELL & REED FINANCIAL, INC.

Strategy: Contrarian Investor
Based on: David Dreman

Waddell & Reed Financial, Inc. is a mutual fund and asset management company. The Company provides investment management, investment advisory, investment product underwriting and distribution and shareholder services administration to Waddell & Reed Advisors group of mutual funds, Ivy Funds, Ivy Funds Variable Insurance Portfolios, InvestEd Portfolios, 529 college savings and Selector Management Fund SICAV and its Ivy Global Investors sub-funds and institutional and separately managed accounts. The Company operates its business through a distribution network. Its retail products are distributed through its Wholesale channel, which includes third parties, such as other broker/dealers, registered investment advisors and various retirement platforms or through its Advisors channel sales force of independent financial advisors. It also markets investment advisory services to institutional investors, either directly or through consultants, in its Institutional channel.

MARKET CAP: FAIL

Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. WDR has a market cap of $1,894 million, therefore failing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. WDR's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.58, 0.76 have been increasing, and therefore the company passes this test.


EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: FAIL

This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. WDR fails this test as its EPS growth rate for the past 6 months (-5.00%) does not beat that of the S&P (-3.16%).


This methodology would utilize four separate criteria to determine if WDR 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. WDR's P/E of 7.88, based on trailing 12 month earnings, meets the bottom 20% criterion (below 11.97), 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. WDR's P/CF of 7.24 does not meet the bottom 20% criterion (below 6.82), 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. WDR's P/B is currently 2.27, which does not meet the bottom 20% criterion (below 0.92), and it therefore fails this test.


PRICE/DIVIDEND (P/D) RATIO: PASS

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%). WDR's P/D of 12.59 meets the bottom 20% criterion (below 19.05), and it therefore passes 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: FAIL

A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for WDR is 59.50%, while its historical payout ratio has been 47.37%. 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 16.24%, and would consider anything over 27% to be staggering. The ROE for WDR of 30.08% 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. WDR's pre-tax profit margin is 26.34%, thus passing this criterion.


YIELD: PASS

The company in question should have a yield that is high and that can be maintained or increased. WDR's current yield is 7.94%, while the market yield is 2.72%. WDR passes this test.

FOSSIL GROUP INC

Strategy: Contrarian Investor
Based on: David Dreman

Fossil Group, Inc. is a global designer, marketer and distributor company that specializes in consumer fashion accessories. The Company's offerings include a line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, soft accessories, and select apparel. The Company operates in four different segments: the North America Wholesale segment, the Europe Wholesale segment, Asia Pacific Wholesale segment and the Direct to Consumer segment. Its products are distributed globally through various distribution channels, including wholesale, retail stores and commercial Websites. The Company sells its products through a diversified distribution network that includes department stores, specialty retail locations, specialty watch and jewelry stores, Company-owned retail and factory outlet stores, mass market stores, and through its FOSSIL Website.

MARKET CAP: FAIL

Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. FOSL has a market cap of $2,030 million, therefore failing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. FOSL's EPS for the past 2 quarters, (from earliest to most recent quarter) 1.19, 1.46 have been increasing, and therefore the company passes this test.


EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: FAIL

This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. FOSL's EPS growth rate over the past 6 months (30.35%) has beaten that of the S&P (-3.16%), but FOSL's estimated EPS growth for the current year is (-32.59%) while that of the S&P is (-12.92%), therefore failing this test.


This methodology would utilize four separate criteria to determine if FOSL 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. FOSL's P/E of 9.32, based on trailing 12 month earnings, meets the bottom 20% criterion (below 11.97), 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. FOSL's P/CF of 6.39 meets the bottom 20% criterion (below 6.82) 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. FOSL's P/B is currently 2.20, which does not meet the bottom 20% criterion (below 0.92), 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%). FOSL's P/D is not available, and hence an opinion cannot be rendered at this time.


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


CURRENT RATIO: PASS

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [630.73] or greater than 2). This is one identifier of financially strong companies, according to this methodology. FOSL's current ratio of 2.95 passes the test.


PAYOUT RATIO: PASS

A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for FOSL is 0.00%. Unfortunately, its historical payout ratio is not available. Nonetheless it passes the payout criterion, as this is a very low payout.


RETURN ON EQUITY: 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 16.24%, and would consider anything over 27% to be staggering. The ROE for FOSL of 23.23% 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. FOSL's pre-tax profit margin is 9.65%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. FOSL's current yield is not available (or one is not paid) at the present time, while the market yield is 2.72%. Hence, this criterion cannot be evaluated.


LOOK AT THE TOTAL DEBT/EQUITY: FAIL

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%. FOSL's Total Debt/Equity of 87.72% is not acceptable.

BANCO MACRO SA (ADR)

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

Banco Macro S.A. (the Bank) is a bank. The Bank offers traditional bank products and services to companies, including those operating in regional economies, as well as to individuals. The Bank offers savings and checking accounts, credit and debit cards, consumer finance loans (including personal loans), mortgage loans, automobile loans, overdrafts, credit-related services, home and car insurance coverage, tax collection, utility payments, automatic teller machines (ATMs) and money transfers. The Bank offers Plan Sueldo payroll services, lending, corporate credit cards, mortgage finance, transaction processing and foreign exchange. The Bank offers transaction services to its corporate customers, such as cash management, customer collections, payments to suppliers, payroll administration, foreign exchange transactions, foreign trade services, corporate credit cards and information services, such as its Datanet and Interpymes services.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (11.84) relative to the growth rate (43.98%), 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 BMA (0.27) is very favorable.


SALES AND P/E RATIO: PASS

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. BMA, whose sales are $1,409.8 million, needs to have a P/E below 40 to pass this criterion. BMA's P/E of (11.84) is considered acceptable.


EPS GROWTH RATE: PASS

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for BMA is 44.0%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

BMA 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. BMA's Equity/Assets ratio (15.00%) is very 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. BMA's ROA (5.57%) 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 BMA (7.01%) 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 BMA (-1.07%) 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.

CAL-MAINE FOODS INC

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

Cal-Maine Foods, Inc. is a producer and marketer of shell eggs in the United States. The Company's primary business is the production, grading, packaging, marketing and distribution of shell eggs. The Company sells its shell eggs in the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States. The Company markets its shell eggs through its distribution network to a group of customers, including national and regional grocery store chains, club stores, foodservice distributors and egg product consumers. Some of its sales are completed through co-pack agreements. It has a total flock of approximately 33.7 million layers and 8.4 million pullets and breeders. The Company markets its specialty shell eggs under brands, such as Egg-Land's Best, Land O' Lakes, Farmhouse and 4-Grain. The Company also produces, markets and distributes private label specialty shell eggs to several customers.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (6.70) relative to the growth rate (22.27%), 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 CALM (0.30) is very favorable.


SALES AND P/E RATIO: PASS

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. CALM, whose sales are $2,008.6 million, needs to have a P/E below 40 to pass this criterion. CALM's P/E of (6.70) 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 CALM was 10.14% last year, while for this year it is 9.28%. Since inventory to sales has decreased from last year by -0.86%, CALM 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 CALM is 22.3%, 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 CALM (2.98%) 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 CALM (2.63%) 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 CALM (9.86%) 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.

HP INC

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

HP Inc., formerly Hewlett-Packard Company, is a provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses and large enterprises. The Company operates in seven business segments: Personal Systems, Printing, the Enterprise Group, Enterprise Services, Software, HP Financial Services and Corporate Investments. It offers personal computing and other access devices; imaging and printing related products and services; enterprise information technology (IT) infrastructure, including enterprise server and storage technology, networking products and solutions, technology support and maintenance; multi-vendor customer services, including technology consulting, outsourcing and support services across infrastructure, applications and business process domains, and software products and solution, including application testing and delivery software, big data analytics, information governance and IT Operations Management.


MARKET CAP: PASS

The Cornerstone Value Strategy looks for large, well known companies whose market cap is greater than $1 billion. These companies exhibit solid and stable earnings. HPQ's market cap of $21,739 million passes this test.


CASH FLOW PER SHARE: PASS

The second criterion requires that the company exhibit strong cash flows. Companies with strong cash flow are typically the value oriented investments that this strategy looks for. The company's cash flow per share must be greater than the mean of the market cash flow per share ($1.41). HPQ's cash flow per share of $4.14 passes this test.


SHARES OUTSTANDING: PASS

This particular strategy looks for companies whose total number of outstanding shares are in excess of the market average (634 million shares). These are the more well known and highly traded companies. HPQ, who has 1,785 million shares outstanding, passes this test.


TRAILING 12 MONTH SALES: PASS

A company's trailing 12 month sales ($75,314 million) are required to be 1.5 times greater than the mean of the market's trailing 12 month sales ($20,788 million). HPQ passes this test.


DIVIDEND: PASS

The final step in the Cornerstone Value strategy is to select the 50 companies from the market leaders group (those that have passed the previous four criteria) that have the highest dividend yield. HPQ, with a dividend yield of 3.94%, is one of the 50 companies that satisfy this last criterion.


Watch List

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

Ticker Company Name Current
Score
ANIK ANIKA THERAPEUTICS INC 76%
SKX SKECHERS USA INC 64%
SAFM SANDERSON FARMS, INC. 61%
JBSS JOHN B. SANFILIPPO & SON, INC. 57%
BANC BANC OF CALIFORNIA INC 53%
TECD TECH DATA CORP 51%
UFPI UNIVERSAL FOREST PRODUCTS, INC. 50%
AAPL APPLE INC. 49%
CHFC CHEMICAL FINANCIAL CORPORATION 47%
WRLD WORLD ACCEPTANCE CORP. 47%



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