The Economy

Economic data has not disappointed since our last newsletter and neither has the market, as the S&P 500 has sustained its advance to new record highs.

Industrial production increased 0.6% in June, according to a new Federal Reserve report. This followed a 0.3% decline in May. Manufacturing output, the largest component of the industrial sector, increased 0.4%, due largely to an increase in motor vehicle assemblies. Utility output rose 2.4%. Seasonal factors played a role in the increase, as the Fed noted warmer weather than is typical for June boosted demand for air conditioning. Mining output also increased, rising 0.2%, its second straight monthly rise following eight months of steady decline.

Retail and food service sales continue to come in strong, rising 0.6% in June after a 0.5% increase in May, according to the latest report from the Census Bureau. Compared to the year-ago period, retail and food service sales were up a solid 2.7%.

Inflation edged higher, as the core Consumer Price Index (which strips out volatile food and energy prices) increased 0.2% in June. Overall inflation came in at the same pace. Compared to a year ago, prices are just 1.0% higher; core prices are 2.3% higher.

The housing sector showed signs of expansion, as New Home Sales increased 3.5% in June, according to the Census Bureau. The figure, 592,000, is the best level since Feb. 2008 and put them about 25% above where they were a year ago. Median sales prices jumped just over 6% and are also about 6% above last year's level.

The FOMC announced on July 27th that rates would remain unchanged. However, the committee's assessment of the economy was more upbeat, noting improvements in the labor market, consumer spending, and a small firming in inflation. "Near-term risks to the economic outlook have diminished," noted the Committee. There was no adjustment to forward guidance.

Overseas, China's manufacturing sector barely expanded in June. The government's official purchasing managers' index (PMI) came in at 50.0 in June, down from 50.1 the previous month, the National Bureau of Statistics said in a report. A PMI reading above 50 is associated with economic growth, whereas a reading below that level signifies contraction. The June report was the weakest since Feb. 2016.

Oil prices continue to slide, as demand has been weak during the peak summer driving season. The price currently stands in the low $40 range, after a reading two weeks ago at roughly the $45 level. Regarding gas prices, a gallon of regular unleaded gas, on average, cost $2.14 on July 28, down from $2.30 a month earlier, according to AAA. That's about 20.7% below where it was a year ago.

Since our last newsletter, the S&P 500 returned 0.3%, while the Hot List returned 1.5%. So far in 2016, the portfolio has returned 7.0% vs. 6.2% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 201.4% vs. the S&P's 116.9% gain.

Is Another Correction in the Offing? If So, Stay The Course

The S&P 500 experienced an official correction earlier this year, with a decline of more than 10%. Specifically, the Index dropped just over 13% from its Nov. 2015 closing high to its closing low in Feb. 2016. This correction occurred over a span of 70 trading days, consistent with the average time span of a typical correction, which is a little more than three months, according to Josh Brown of The Reformed Broker. Brown makes note of this useful nugget of information as well as many other interesting facts regarding the nature of stock market corrections in his piece entitled "Field Guide to Stock Market Corrections" (which uses data from Dow Jones, Morningstar, and Bloomberg). Brown notes that during the post-World War era, corrections have occurred 27 times, more than twice as often as bear markets over the same period. And, the average loss during a market correction is 13.3%. Thus the 2016 Nov. 2015-Feb. 2016 correction again fell right in line with the norm.

However, what this latest correction did not conform to was average frequency. Top fund manager Bill Nygren, in a 2014 interview with Fortune, noted that "through long periods of history, we've seen 10% corrections about every year and a half on average." But, the Nov. 2015-Feb. 2016 correction began just about two and a half months following the July-August 2015 decline which shaved just over 12% off the S&P 500. Could it be that, at six and a half years into this bull market, corrections may begin to occur at a greater frequency? The potential for more frequent corrections, along with the fact the S&P 500 has recovered smartly from its first quarter slide and advanced to new all-time highs, raises the concern - could the S&P 500 be vulnerable to another impending drop of 10% or more?

It appears that investors are indeed anxious over such a development taking place. According to the Wall Street Journal, "investors are pouring billions of dollars into funds that promise to minimize market swings, highlighting the anxiety that prevails after [nearly] seven years of stock gains." Risk avoidance, achieved by investing in low or minimum volatility funds, is a theme that has prevailed this year. According to Morningstar, the top-five low-volatility exchange-traded funds added a net $12.5 billion through June 30 while, over the same period, investors pulled about $52 billion from U.S. equity funds.

However, is prepping for a downdraft in the market a wise idea with the S&P 500 still hovering near its recently established new record highs? Granted, embarking on a more defensive strategy can reap worthwhile benefits, provided the timing of the move is right. And therein lies the rub, the timing of the move. Such market timing is rarely a strong suit of the vast majority of investors, a theme that I have expounded upon frequently in my writings. My opinion on this topic has been derived by my adherence to the principles of the gurus -- a group of investors whose performance has been nothing short of spectacular over extended periods of time.

There is a common theme among the gurus I follow -- they don't claim to be able to time the market to avoid the inevitable corrections which are a normal part of stock market price behavior. For example, Warren Buffett, considered to be the greatest investor of all time, advises against trying to sidestep market declines. In their book, The New Buffettology, Mary Buffett and David Clark wrote that "Warren believes that corrections and panics are perfect buying opportunities for the selective contrarian investor." And, in regard to market forecasting, Buffett has been quoted as stating, "We have long felt that the only value of stock forecasters is to make fortune-tellers look good." In addition, mutual fund legend Peter Lynch, another guru I follow, once told PBS that bear markets are inevitable. "When they're gonna start, no one knows," Lynch said. "If you're not ready for that, you shouldn't be in the stock market. I mean stomach is the key organ here. It's not the brain. Do you have the stomach for these kind of declines?"

And, the problem with attempting to time a market correction, is that two key decisions must be made -- when to exit the market and when to get back in. Timing such moves is of utmost importance, particularly since the most dramatic gains tend to occur coming off the lows of a correction. Take the advance following the Feb. 2016 low. In the first thirty trading days off the bottom, the S&P 500 advanced 11.4%. Thus, you would have missed out on a rather sizeable gain had you moved to the sidelines during the decline and then been a month late getting back into the market.

What about now, with the S&P 500 sitting at all-time highs and the possibility that, at the current stage of this old and persistent bull market, the potential for more frequent corrections could be increasing, given the diminished time span between the last two downturns relative to the historical norm? Or, even worse, perhaps the end of the bull market is near, given its lengthy duration. Granted, depending upon the source, the reported average length of a bull market can vary widely. But, there is no arguing that, at nearly six and a half years old, the current bull market appears to be long in the tooth.

But, so what? Should simply the length of the current up-cycle in the stock market be reason enough to expect a significant downturn? In March 2015, roughly one and a half years ago, in a MarketWatch column, Chuck Jaffe said investors should beware "bad motivations" for changing up their portfolios due to the age of the bull market. One bad motivation: The idea that the market can't go up forever, and/or we are overdue for a downturn. He noted the aforementioned Bill Nygren, co-manager of the Oakmark Fund, reminded him that, for well over half of his career, he has been investing when the market was at all-time highs, and that he hoped that would continue for the rest of his career. Nygren went on to state, "Investors tend to be overly scared by the term 'record high,'" he said. "I've been in this business now for more than 30 years and more than half of the years I have been in the business, the S&P has been at a record high and -- in most of those years -- multiple record highs. And during those years, the S&P has gone up something like 20-fold. When you have an asset class like equities which you expect to offer positive rates of return, it's not odd that we're at record highs."

The bottom line is corrections are a healthy and normal part of the stock market environment. They help shake excess positive sentiment out of the market, letting valuations and prices fall a bit to set the stage for continued gains, rather than having the market get so far ahead of itself that a crash becomes likely. They can develop at any time, without much warning, and the anticipation of a potential stock market decline serves a purpose by creating the equity risk premium, or the excess return that investing in the stock market provides over a risk-free rate. The fear of a market decline will never go away, it's the nature of the business. However, instead of gearing up for a perceived downturn in the market based on extraneous factors such as time or mere worry, strategies that focus on stocks with strong fundamentals are a good bet over the long haul, regardless of what volatile swings the market may deliver. Benjamin Graham's rationale in regard to investing reflects this concept quite clearly. To quote from the Benjamin Graham chapter of my book, The Guru Investor, "In the short-term, stocks are unpredictable, but in the long run, a stock's price tends to move with and reflect the real value of the business, which is indicated by its fundamentals - its price-earnings and price-book ratios, the amount of sales it does, the level of debt it has in relation to its assets, the ratio of its assets to its liabilities." Buy cheap stocks of good companies, and you should do well over the long term, regardless of what happens day-to-day or week-to-week. A philosophy such as this is how Graham, as well as the other gurus I follow, have achieved such overwhelming success and how the Hot List's performance remains far ahead of the market's over the long run.


The Fallen

As we rebalance the Validea Hot List, 5 stocks leave our portfolio. These include: Caleres Inc (CAL), Ormat Technologies, Inc. (ORA), Thor Industries, Inc. (THO), Drew Industries, Inc. (DW) and Polaris Industries Inc. (PII).

The Keepers

5 stocks remain in the portfolio. They are: Valero Energy Corporation (VLO), Anika Therapeutics Inc (ANIK), Nic Inc. (EGOV), Banco Macro Sa (Adr) (BMA) and Lgi Homes Inc (LGIH).

The New Additions

We are adding 5 stocks to the portfolio. These include: Insteel Industries Inc (IIIN), Cal-maine Foods Inc (CALM), Natural Health Trends Corp. (NHTC), Hawaiian Holdings, Inc. (HA) and Paycom Software Inc (PAYC).

Latest Changes

Additions  
INSTEEL INDUSTRIES INC IIIN
CAL-MAINE FOODS INC CALM
NATURAL HEALTH TRENDS CORP. NHTC
HAWAIIAN HOLDINGS, INC. HA
PAYCOM SOFTWARE INC PAYC
Deletions  
CALERES INC CAL
ORMAT TECHNOLOGIES, INC. ORA
THOR INDUSTRIES, INC. THO
DREW INDUSTRIES, INC. DW
POLARIS INDUSTRIES INC. PII
Newcomers to the Validea Hot List

Cal-Maine Foods Inc. (CALM): 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.

Cal-Maine Foods ($1.98 billion market cap) has taken in more than $1.9 billion in sales over the past year. My Joel Greenblatt-, Ken Fisher-, and Benjamin Graham-inspired models are high on its shares. For details about its fundamentals, see the "Detailed Stock Analysis" section.

Hawaiian Holdings, Inc. (HA): Hawaiian Holdings, Inc. is a holding company. The Company, through its subsidiary, Hawaiian Airlines, Inc. (Hawaiian) is engaged in the scheduled air transportation of passengers and cargo. The Company offers transportation amongst the Hawaiian Islands (the Neighbor Island routes); between the Hawaiian Islands and certain cities in the United States (the North America routes), and between the Hawaiian Islands and the South Pacific, Australia, New Zealand and Asia (the International routes), collectively referred to as the Company's Scheduled Operations. It offers non-stop service to Hawai'i from over 10 of the United States gateway cities. It also provides approximately 160 daily flights between the Hawaiian Islands. It operates various charter flights. The Company's fleet consists of over 20 Boeing 717-200 aircraft for the Neighbor Island routes, and approximately eight Boeing 767-300 aircraft and over 20 Airbus A330-200 aircraft for the North America, International and charter routes.

Hawaiian Holdings ($2.45 billion market cap) gets an 89% score from my Momentum Investor model and receives high marks from my Joel Greenblatt- and Motely Fool-based models. Scroll down to the "Detailed Stock Analysis" section to learn more about the stock.

Insteel Industries, Inc. (IIIN): Insteel Industries, Inc. (Insteel) is a manufacturer of steel wire reinforcing products for concrete construction applications. The Company manufactures and markets PC strand and welded wire reinforcement (WWR), including Engineered Structural Mesh (ESM), concrete pipe reinforcement (CPR) and standard welded wire reinforcement (SWWR). The Company's products are sold to manufacturers of concrete products that are used in nonresidential construction. Insteel has two wholly owned subsidiaries, Insteel Wire Products Company (IWP), an operating subsidiary, and Intercontinental Metals Corporation, an inactive subsidiary. The Company's concrete reinforcing products consist of PC strand and WWR. PC strand provides reinforcement for bridges, parking decks, buildings and other concrete structures. Welded Wire Reinforcement produces engineered reinforcing product for use in nonresidential and residential construction.

Insteel ($666 million market cap) has an annual earnings growth rate over the past five years of 113.6% and receives an 89% score from my Momentum Investor model. My Martin Zweig- and Motely Fool-inspired models are also high on its shares. For details about its fundamentals, see the "Detailed Stock Analysis" section.

Natural Health Trends Corp. (NHTC): Natural Health Trends Corp. is a direct-selling and e-commerce company. The Company, through its subsidiaries, sells personal care, wellness and quality of life products under the NHT Global brand. The Company offers a line of NHT Global branded products in approximately five categories, including wellness, herbal, beauty, lifestyle and home. Its wellness products include Premium Noni Juice, Triotein, Cluster X2, Children's Chewable MultiVitamin, ReStor Silver, ReStor Vital, HerBalance, FibeRich, Energin, Essential Probiotics, Omega 3 Essential Fatty Acids and Memory Burst. Its herbal products include LivaPro, Cordyceps Mycelia CS-4 and Purus. Its beauty products include Skindulgence 30-Minute Non-Surgical Facelift System, Time Restore Eye Cream and Essence, BioCell Mask, Soothe and Floraeda Hydrating Series. Its lifestyle products include Alura Lux by NHT Global, Valura, LaVie Vibrant Energy drink and Twin Slim Diet Jelly. Its home products include PurAir Air Purifier.

Natural Health Trends ($390 million market cap) gets 100% scores from my James O'Shaughnessy- and Joel Greenblatt-based models. To read more about its fundamentals, check out the "Detailed Stock Analysis" section below.

Paycom Software, Inc. (PAYC): Paycom Software, Inc. (Paycom) is a provider of cloud-based human capital management (HCM) software solution delivered as software as a service (SaaS). The Company's solution is based on a system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources (HR) management applications. Talent acquisition includes applicant tracking, on-boarding, e-verify and tax credit services. Time and labor management includes time and attendance, scheduling/schedule exchange, time-off requests, labor allocation and labor management reports/push reporting. Payroll includes payroll and tax management, Paycom pay, expense management, garnishment management and GL Concierge. Talent management includes employee self-service, executive dashboard and Paycom learning. Human resources management includes document and task management, government and compliance, and benefits administration.

Paycom ($2.83 billion market cap) receives an 89% score from my Momentum Investor model and gets high marks from my Peter Lynch- and Motley Fool-based models. To read more about its fundamentals, check out the "Detailed Stock Analysis" section below.

News about Validea Hot List Stocks

Anika Therapeutics Inc. (ANIK): Anika reported second-quarter profit of $8.6 million on July 27th. The company said it had net income of 57 cents per share. The results exceeded analyst expectations.

LGI Homes Inc. (LGIH): LGI joined the S&P 600 Small Cap Index as of the close of trading on July 27th.

Hawaiian Holdings, Inc. (HA): Hawaiian Holdings reported adjusted earnings of $1.21 per share on $594.6 million in revenue on July 21st, beating Wall Street expectations.

Natural Health Trends Corp. (NHTC): Natural Health Trends reported second quarter profit of $12.2 billion on July 26th. On a per-share basis, the company said it had profit of $1.07. Earnings, adjusted for non-recurring costs were $1.28 per share.

The Next Issue

In two weeks, we will publish another issue of the Hot List, at which time we will take an in-depth look at my investment strategies. If you have any questions, please feel free to contact us at hotlist@validea.com.

Portfolio Holdings
Ticker Date Added Return
BMA 7/1/2016 0.1%
NHTC 7/29/2016 TBD
ANIK 5/6/2016 11.8%
VLO 6/3/2016 -5.9%
EGOV 7/1/2016 7.0%
IIIN 7/29/2016 TBD
LGIH 7/1/2016 7.2%
CALM 7/29/2016 TBD
HA 7/29/2016 TBD
PAYC 7/29/2016 TBD


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

BMA   |   NHTC   |   ANIK   |   VLO   |   EGOV   |   IIIN   |   LGIH   |   CALM   |   HA   |   PAYC   |  

BANCO MACRO SA (ADR)

Strategy: Growth Investor
Based on: Martin Zweig

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


P/E RATIO: PASS

The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. BMA's P/E is 12.22, based on trailing 12 month earnings, while the current market PE is 15.00. Therefore, it passes the first test.


REVENUE GROWTH IN RELATION TO EPS GROWTH: PASS

Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. BMA's revenue growth is 42.07%, while it's earnings growth rate is 44.21%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, BMA 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 (52.8%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (40.5%) of the current year. Sales growth for the prior must be greater than the latter. For BMA 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. BMA's EPS ($1.60) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. BMA's EPS for this quarter last year ($0.10) pass this test.


POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS

The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. BMA's growth rate of 1,500.00% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: FAIL

Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for BMA is 22.10%. This should be less than the growth rates for the 3 previous quarters which are 18.18%, 214.29% and 23.08%. BMA does not pass this test, which means that it does not have good, reasonably steady earnings.


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


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

If the growth rate of the prior three quarter's earnings, 64.52%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 1,500.00%, (versus the same quarter one year ago) then the stock passes.


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

The EPS growth rate for the current quarter, 1,500.00% must be greater than or equal to the historical growth which is 44.21%. BMA would therefore pass this test.


EARNINGS PERSISTENCE: PASS

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. BMA, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.13, 0.18, 0.28, 0.40 and 0.57, passes this test.


LONG-TERM EPS GROWTH: PASS

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. BMA's long-term growth rate of 44.21%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.

NATURAL HEALTH TRENDS CORP.

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

Natural Health Trends Corp. is a direct-selling and e-commerce company. The Company, through its subsidiaries, sells personal care, wellness and quality of life products under the NHT Global brand. The Company offers a line of NHT Global branded products in approximately five categories, including wellness, herbal, beauty, lifestyle and home. Its wellness products include Premium Noni Juice, Triotein, Cluster X2, Children's Chewable MultiVitamin, ReStor Silver, ReStor Vital, HerBalance, FibeRich, Energin, Essential Probiotics, Omega 3 Essential Fatty Acids and Memory Burst. Its herbal products include LivaPro, Cordyceps Mycelia CS-4 and Purus. Its beauty products include Skindulgence 30-Minute Non-Surgical Facelift System, Time Restore Eye Cream and Essence, BioCell Mask, Soothe and Floraeda Hydrating Series. Its lifestyle products include Alura Lux by NHT Global, Valura, LaVie Vibrant Energy drink and Twin Slim Diet Jelly. Its home products include PurAir Air Purifier.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (7.69) relative to the growth rate (129.64%), based on the average of the 3 and 4 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 NHTC (0.06) is very favorable.


SALES AND P/E RATIO: NEUTRAL

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. NHTC, whose sales are $309.2 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.


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 NHTC was 3.02% last year, while for this year it is 3.95%. 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 (0.93%) is below 5%.


EPS GROWTH RATE: FAIL

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 NHTC is 129.6%, based on the average of the 3 and 4 year historical eps growth rates, which is considered too fast.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for NHTC (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 NHTC (19.13%) 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 NHTC (28.60%) 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.

ANIKA THERAPEUTICS INC

Strategy: Growth Investor
Based on: Martin Zweig

Anika Therapeutics, Inc. is an orthopedic medicines company. The Company offers therapeutic pain management solutions. It is engaged in developing, manufacturing and commercializing approximately 20 products based on its hyaluronic acid (HA) technology. It orthopedic medicine portfolio consists of marketed (ORTHOVISC and MONOVISC) and pipeline (CINGAL and HYALOFAST in the United States) products to alleviate pain and restore joint function by replenishing depleted HA and aiding cartilage repair and regeneration. Its therapeutic offerings consist of products in the areas, such as Orthobiologics, Dermal, Surgical, Ophthalmic and Veterinary. It offers products made from HA based on two technologies: HYAFF, which is a solid form of HA, and ACP gel, an autocross-linked polymer of HA. Its orthobiologics products primarily consist of viscosupplementation and regenerative orthopedics products. Its viscosupplementation franchise includes ORTHOVISC, ORTHOVISC mini, MONOVISC, and CINGAL.


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. ANIK's P/E is 21.52, based on trailing 12 month earnings, while the current market PE is 15.00. 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. ANIK's revenue growth is 9.81%, while it's earnings growth rate is 37.67%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, ANIK fails this criterion.


SALES GROWTH RATE: FAIL

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (16.1%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (43.6%) of the current year. Sales growth for the prior must be greater than the latter. For ANIK 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. ANIK's EPS ($0.57) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. ANIK's EPS for this quarter last year ($0.51) 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. ANIK's growth rate of 11.76% 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 ANIK is 18.84%. This should be less than the growth rates for the 3 previous quarters, which are 37.50%, 41.18%, and 95.65%. ANIK 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, 50.88%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 11.76%, (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 ANIK is 11.8%, 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, 11.76% must be greater than or equal to the historical growth which is 37.67%. Since this is not the case ANIK would therefore fail this test.


EARNINGS PERSISTENCE: FAIL

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. ANIK, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.62, 0.82, 1.39, 2.51, and 2.01, fails this test.


LONG-TERM EPS GROWTH: PASS

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. ANIK's long-term growth rate of 37.67%, 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. ANIK's Debt/Equity (0.00%) is not considered high relative to its industry (108.49%) 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 ANIK, this criterion has not been met (insider sell transactions are 42, while insiders buying number 37). 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.

VALERO ENERGY CORPORATION

Strategy: Value Investor
Based on: Benjamin Graham

Valero Energy Corporation (Valero), through Valero Energy Partners LP (VLP), owns, operates, develops and acquires crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets. The Company operates in two segments: refining and ethanol. Its refining segment includes refining and marketing operations in the United States, Canada, the United Kingdom, Aruba and Ireland. Its ethanol segment includes ethanol and marketing operations in the United States. VLP's assets include crude oil and refined petroleum products pipeline and terminal systems in the United States Gulf Coast and the United States Mid-Continent regions. Its refineries can produce conventional gasolines, premium gasolines, gasoline meeting the specifications of the California Air Resources Board (CARB), diesel, low-sulfur diesel, ultra-low-sulfur diesel, CARB diesel, other distillates, jet fuel, asphalt, petrochemicals, lubricants and other refined products.


SECTOR: PASS

VLO 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 $340 million. VLO's sales of $76,654.0 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. VLO's current ratio of 2.13 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 VLO is $7,207.0 million, while the net current assets are $7,904.0 million. VLO passes this test.


LONG-TERM EPS GROWTH: FAIL

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for VLO were negative within the last 5 years and therefore the company fails this criterion.


P/E RATIO: PASS

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. VLO's P/E of 8.38 (using the current 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. VLO's Price/Book ratio is 1.19, while the P/E is 8.38. VLO passes the Price/Book test.

NIC INC.

Strategy: Growth Investor
Based on: Martin Zweig

NIC Inc. is a provider of digital government services that help governments use technology. The Company operates through Outsourced Portals segment. The Other Software & Services category includes its subsidiaries that provide software development and services, other than outsourced portal services, to state and local governments, as well as federal agencies. The Company offers its services through two channels: primary outsourced portal businesses, and software & services businesses. In its primary outsourced portal businesses, it enters into long-term contracts with state and local governments to design, build, and operate Internet-based, enterprise-wide portals on their behalf. These portals consist of Websites and applications that the Company has built to allow businesses and citizens to access government information online and secure transactions, such as applying for a permit, retrieving government records, or filing a government-mandated form or report.


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. EGOV's P/E is 33.83, based on trailing 12 month earnings, while the current market PE is 15.00. 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. EGOV's revenue growth is 12.29%, while it's earnings growth rate is 16.54%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, EGOV 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 (11.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-73.8%) of the current year. Sales growth for the prior must be greater than the latter. For EGOV 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. EGOV's EPS ($0.19) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. EGOV's EPS for this quarter last year ($0.14) 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. EGOV's growth rate of 35.71% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: FAIL

Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for EGOV is 8.27%. This should be less than the growth rates for the 3 previous quarters which are 0.00%, 18.75% and -76.27%. EGOV does not pass this test, which means that it does not have good, reasonably steady earnings.


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


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

If the growth rate of the prior three quarter's earnings, -45.65%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 35.71%, (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, 35.71% must be greater than or equal to the historical growth which is 16.54%. EGOV 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. EGOV, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.35, 0.40, 0.49, 0.59 and 0.63, 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. EGOV's long-term growth rate of 16.54%, 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. EGOV's Debt/Equity (0.00%) is not considered high relative to its industry (56.59%) 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 EGOV, this criterion has not been met (insider sell transactions are 352, while insiders buying number 4). 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.

INSTEEL INDUSTRIES INC

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

Insteel Industries, Inc. (Insteel) is a manufacturer of steel wire reinforcing products for concrete construction applications. The Company manufactures and markets PC strand and welded wire reinforcement (WWR), including Engineered Structural Mesh (ESM), concrete pipe reinforcement (CPR) and standard welded wire reinforcement (SWWR). The Company's products are sold to manufacturers of concrete products that are used in nonresidential construction. Insteel has two wholly owned subsidiaries, Insteel Wire Products Company (IWP), an operating subsidiary, and Intercontinental Metals Corporation, an inactive subsidiary. The Company's concrete reinforcing products consist of PC strand and WWR. PC strand provides reinforcement for bridges, parking decks, buildings and other concrete structures. Welded Wire Reinforcement produces engineered reinforcing product for use in nonresidential and residential construction.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (17.74) relative to the growth rate (116.12%), based on the average of the 3 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 IIIN (0.15) is very favorable.


SALES AND P/E RATIO: NEUTRAL

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. IIIN, whose sales are $433.5 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.


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 IIIN was 20.03% last year, while for this year it is 14.75%. Since inventory to sales has decreased from last year by -5.27%, IIIN passes this test.


EPS GROWTH RATE: FAIL

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 IIIN is 116.1%, based on the average of the 3 and 5 year historical eps growth rates, which is considered too fast.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for IIIN (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 IIIN (3.84%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for IIIN (5.05%) 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.

LGI HOMES INC

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

LGI Homes, Inc. is a homebuilder. The Company is engaged in the design, construction, marketing and sale of new homes in markets in Texas, Arizona, Florida, Georgia, New Mexico, South Carolina, North Carolina, Colorado, Washington and Tennessee. The Company has five segments: the Texas division, the Southwest division, the Southeast division, the Florida division and the Northwest division. The Texas division includes homebuilding operations in Houston, Dallas/Fort Worth, San Antonio and Austin locations. The Southwest division includes homebuilding operations in Phoenix, Tucson, Albuquerque, Denver and Colorado Springs locations. The Southeast division includes homebuilding operations in Atlanta, Charlotte and Nashville locations. The Florida division includes homebuilding operations in Tampa, Orlando, Fort Myers and Jacksonville locations. The Northwest division includes homebuilding operations in Seattle location. Its product offerings include entry-level homes and move-up homes.


PROFIT MARGIN: PASS

This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. LGIH's profit margin of 8.46% passes this test.


RELATIVE STRENGTH: PASS

The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. LGIH, with a relative strength of 94, satisfies this test.


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

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for LGIH (72.73% for EPS, and 34.61% for Sales) are good enough to pass.


INSIDER HOLDINGS: PASS

LGIH's insiders should own at least 10% (they own 17.46% ) of the company's outstanding shares which is the minimum required. A high percentage typically indicates that the insiders are confident that the company will do well.


CASH FLOW FROM OPERATIONS: FAIL

A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. LGIH's free cash flow of $-4.10 per share fails this test.


PROFIT MARGIN CONSISTENCY: FAIL

The profit margin in the past must be consistently increasing. The profit margin of LGIH has been inconsistent in the past three years (Current year: 8.38%, Last year: 7.36%, Two years ago: 13.72%), which is unacceptable. This inconsistency will carryover directly to the company's bottom line, or earnings per share.


R&D AS A PERCENTAGE OF SALES: NEUTRAL

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


CASH AND CASH EQUIVALENTS: FAIL

LGIH's level of cash and cash equivalents per sales, 5.59 %, does not pass this criteria of roughly 20%(a number we determined to be appropriate based on various examples). LGIH will have a more difficult time paying off debt (if it has any) or acquiring other companies than a company that passes this criteria.


INVENTORY TO SALES: PASS

This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for LGIH was 95.99% last year, while for this year it is 84.29%. Since the inventory to sales is decreasing by -11.70% the stock passes this criterion.


ACCOUNT RECEIVABLE TO SALES: PASS

This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for LGIH was 1.92% last year, while for this year it is 2.75%. Although the AR to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive.


LONG TERM DEBT/EQUITY RATIO: FAIL

LGIH's trailing twelve-month Debt/Equity ratio (122.62%) is too high, according to this methodology. You can find other more superior companies that do not have to borrow money in order to grow.


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

The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (LGIH's is 0.16), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. LGIH passes this test.

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

AVERAGE SHARES OUTSTANDING: PASS

LGIH has not been significantly increasing the number of shares outstanding within recent years which is a good sign. LGIH currently has 20.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.


SALES: FAIL

Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. LGIH's sales of $672.0 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years.


DAILY DOLLAR VOLUME: PASS

LGIH passes the Daily Dollar Volume (DDV of $17.0 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf."


PRICE: PASS

This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. LGIH with a price of $35.21 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.


INCOME TAX PERCENTAGE: PASS

LGIH's income tax paid expressed as a percentage of pretax income this year was (34.19%) and last year (34.52%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.

CAL-MAINE FOODS INC

Strategy: Contrarian Investor
Based on: David Dreman

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.

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. CALM has a market cap of $1,965 million, therefore failing the test.


EARNINGS TREND: FAIL

A company should show a rising trend in the reported earnings for the most recent quarters. CALM's EPS for the latest quarter is not greater than the prior quarter, (from earliest to most recent quarter) 1.33, -0.01. Hence the stock fails this test, but the investor should evaluate this company qualitatively to see if it qualifies under this methodology's "exception rule".


EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: 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. Unfortunately, we do not have sufficient data available on CALM at this time.


This methodology would utilize four separate criteria to determine if CALM 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. CALM's P/E of 6.20, based on trailing 12 month earnings, meets the bottom 20% criterion (below 12.37), 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. CALM's P/CF of 5.42 meets the bottom 20% criterion (below 7.24) 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. CALM's P/B is currently 2.15, which does not meet the bottom 20% criterion (below 0.95), 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%). CALM's P/D of 16.23 meets the bottom 20% criterion (below 20.04), 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.


CURRENT RATIO: PASS

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [4.83] or greater than 2). This is one identifier of financially strong companies, according to this methodology. CALM's current ratio of 7.50 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 CALM is 33.40%, while its historical payout ratio has been 33.48%. 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 16.06%, and would consider anything over 27% to be staggering. The ROE for CALM of 39.04% 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. CALM's pre-tax profit margin is 25.53%, thus passing this criterion.


YIELD: PASS

The company in question should have a yield that is high and that can be maintained or increased. CALM's current yield is 6.16%, while the market yield is 2.67%. CALM passes 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 31.26%. CALM's Total Debt/Equity of 2.79% is considered acceptable.

HAWAIIAN HOLDINGS, INC.

Strategy: Contrarian Investor
Based on: David Dreman

Hawaiian Holdings, Inc. is a holding company. The Company, through its subsidiary, Hawaiian Airlines, Inc. (Hawaiian) is engaged in the scheduled air transportation of passengers and cargo. The Company offers transportation amongst the Hawaiian Islands (the Neighbor Island routes); between the Hawaiian Islands and certain cities in the United States (the North America routes), and between the Hawaiian Islands and the South Pacific, Australia, New Zealand and Asia (the International routes), collectively referred to as the Company's Scheduled Operations. It offers non-stop service to Hawai'i from over 10 the United States gateway cities. It also provides approximately 160 daily flights between the Hawaiian Islands. It operates various charter flights. The Company's fleet consists of over 20 Boeing 717-200 aircraft for the Neighbor Island routes, and approximately eight Boeing 767-300 aircraft and over 20 Airbus A330-200 aircraft for the North America, International and charter routes.

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. HA has a market cap of $2,444 million, therefore failing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. HA's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.95, 1.48 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. HA passes this test as its EPS growth rate over the past 6 months (124.24%) has beaten that of the S&P (-7.32%). HA's estimated EPS growth for the current year is (64.09%), which indicates the company is expected to experience positive earnings growth. As a result, HA passes this test.


This methodology would utilize four separate criteria to determine if HA 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. Dreman uses the PE based on five year average earnings for cyclicals to counteract the fluctations in earnings they experience. HA's P/E of 38.00 is higher than the bottom 20% criterion (below 12.37), and therefore fails 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. HA's P/CF of 7.06 meets the bottom 20% criterion (below 7.24) 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. HA's P/B is currently 4.32, which does not meet the bottom 20% criterion (below 0.95), 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%). HA'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 [0.65] or greater than 2). This is one identifier of financially strong companies, according to this methodology. HA's current ratio of 0.93 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 HA 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 16.06%, and would consider anything over 27% to be staggering. The ROE for HA of 53.41% 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. HA's pre-tax profit margin is 16.42%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. HA's current yield is not available (or one is not paid) at the present time, while the market yield is 2.67%. Hence, this criterion cannot be evaluated.


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 168.14%. HA's Total Debt/Equity of 103.51% is considered acceptable.

PAYCOM SOFTWARE INC

Strategy: Growth Investor
Based on: Martin Zweig

Paycom Software, Inc. (Paycom) is a provider of cloud-based human capital management (HCM) software solution delivered as software as a service (SaaS). The Company's solution is based on a system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources (HR) management applications. Talent acquisition includes applicant tracking, on-boarding, e-verify and tax credit services. Time and labor management includes time and attendance, scheduling/schedule exchange, time-off requests, labor allocation and labor management reports/push reporting. Payroll includes payroll and tax management, Paycom pay, expense management, garnishment management and GL Concierge. Talent management includes employee self-service, executive dashboard and Paycom learning. Human resources management includes document and task management, government and compliance, and benefits administration.


P/E RATIO: FAIL

The P/E of a company must be greater than 5 to eliminate weak companies, not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. PAYC's P/E is 84.22, based on trailing 12 month earnings, while the current market P/E is 15.00. Therefore, it fails 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. PAYC's revenue growth is 41.41%, while it's earnings growth rate is 193.31%, based on the average of the 3 and 5 year historical eps growth rates using the current fiscal year eps estimate. Sales growth is not at least 85% of EPS growth so the initial part of this criteria is not met, however, since both sales growth and eps growth are greater than 30%, that requirement is waived and the company passes this test.


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 (63.2%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (47.9%) of the current year. Sales growth for the prior must be greater than the latter. For PAYC 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. PAYC's EPS ($0.32) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. PAYC's EPS for this quarter last year ($0.11) pass this test.


POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS

The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. PAYC's growth rate of 190.91% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: FAIL

Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for PAYC is 96.65%. This should be less than the growth rates for the 3 previous quarters which are 1,100.00%, 40.00% and 60.00%. PAYC does not pass this test, which means that it does not have good, reasonably steady earnings.


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


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

If the growth rate of the prior three quarter's earnings, 177.78%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 190.91%, (versus the same quarter one year ago) then the stock passes.


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

The EPS growth rate for the current quarter, 190.91% must be greater than or equal to the historical growth which is 193.31%. Since this is not the case PAYC would therefore fail this test.


EARNINGS PERSISTENCE: FAIL

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. PAYC, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.03, -0.01, 0.01, 0.11, and 0.36, fails this test.


LONG-TERM EPS GROWTH: PASS

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. PAYC's long-term growth rate of 193.31%, based on the average of the 3 and 5 year historical eps growth rates using the current fiscal year eps estimate, 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. PAYC's Debt/Equity (21.59%) is not considered high relative to its industry (48.41%) 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 PAYC, this criterion has not been met (insider sell transactions are 51, while insiders buying number 14). 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.


Watch List

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

Ticker Company Name Current
Score
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SAFM SANDERSON FARMS, INC. 32%
ORA ORMAT TECHNOLOGIES, INC. 32%
HII HUNTINGTON INGALLS INDUSTRIES INC 31%
LPL LG DISPLAY CO LTD. (ADR) 30%
SIGI SELECTIVE INSURANCE GROUP 29%
WLK WESTLAKE CHEMICAL CORPORATION 28%



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