The Economy

Earlier this year, the US economy looked like it might be ready to tap out after a nearly seven-year expansion. But over the past month or so, it's shown signs that it still has some fight left.

The private sector added 173,000 jobs in May, according to payroll processor ADP, which is on the lower side compared to the monthly numbers for the past year but still a solid improvement. The firm also revised its April jobs-added number upward by 10,000. The service sector again drove the gains, adding 175,000 jobs; the goods-producing sector actually lost 1,000 jobs. The Labor Department is scheduled to release its May jobs report today, and we'll see how its data compares to ADP's findings. One thing to keep in mind: ADP did not factor Verizon's 36,000-worker strike into its data, but the strike is expected to impact the Labor Department's figure.

Despite the weak manufacturing sector jobs data, the sector did expand in May for the third straight month, again at a relatively slow pace, according to the Institute for Supply Management. Strong levels of new orders were in part to thank for the continuing expansion. Prices rose for the third straight month. Since contracting sharply in February, they have risen sharply in each of the past three months. The manufacturing index reading was well above the level that indicates growth of the overall economy, the 84th straight month it has been above that mark. The reading corresponded to a 2.6% increase in real annualized gross domestic product.

The housing sector offered some good news. After falling in March, new home sales rebounded sharply in April, rising 16.6%, according to the Census Bureau. That put them about 27% above where they were a year ago. Median sales prices jumped nearly 8% and are about 9.7% above last year's level.

Personal income rose a solid 0.4% in April for the second straight month, according to the Commerce Department. Real disposable personal income rose 0.2%, while real personal consumption expenditures surged 0.6%. Amid all of this, the personal savings rate fell 0.5 percentage points to a still very strong 5.4%.

Oil prices have remained in the high-$40 price range, while gas prices continue to rebound. As of May 31, a gallon of regular unleaded on average cost $2.32, up from $2.21 a month earlier. That's still 15% below where it was one year ago.

Overseas, China continues to scuffle. The government's factory activity gauge indicated that the manufacturing sector expanded for the third straight month in May, but it did so very slowly, according to Reuters. A private survey indicated that the manufacturing sector shrunk slightly, as decreasing demand continues to lead smaller manufacturers to cut back sharply on jobs. China's services sector did expand at a fairly healthy rate during May, however.

Recent data from research company Dazhihui indicated, meanwhile, that mainland-listed Chinese companies' net profits fell in 2015 for the first time since 2008. They declined 1.1%, Nikkei Asian Review reported, adding that net profits for non-financial companies tumbled 15.7%. Oil was a big reason behind the decline, with profits of China's three major state-owned companies falling 60%.

Since our last newsletter, the S&P 500 returned 3.2%, while the Hot List returned 5.2%. So far in 2016, the portfolio has returned 2.3% vs. 3.0% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 188.3% vs. the S&P's 110.4% gain.

The "Hurry Up And Kiss Me" Market

We've all been there: You're out on a date with someone you like. The night has gone well, and now there's a pause in the conversation as you stand outside the restaurant and prepare to say good night. Eyes meet. Pulses pound. Should you make your move? A million thoughts and emotions seem to be rocketing through your mind. You want to move in for the good night kiss, but what if you get rejected? You've been rejected before, and it stinks. You don't want to feel like that again -- no way. It's too risky. Better just go with a hug.

But you do want to move in for the kiss. And you feel good about the way the night has gone. There is chemistry here. You're sure of it. So you summon up your courage, push your fears and bad memories of past rejections to the back of your mind. You lean in ever so subtly --

Wait -- it's not right. You swear you saw just the slightest hint of discomfort in your date's expression. So you pause. Are you imagining things? Maybe it's just nerves. Yes, you think, it's just nerves. You think about leaning back in, but now it feels like the moment has passed -- it's too late, you think. You and your date exchange a polite "good night," and that's it. The opportunity.

It may sound strange, but I think a similar scenario has been playing out for investors in recent years. I call it the "Hurry Up And Kiss Me" market. The financial crisis and Great Recession were incredibly painful events for investors, the financial equivalent of going in for a good night kiss and having your date slap you in the face. Because of that, many investors have spent the last several years sitting on the sidelines, even as the S&P 500 has tripled. Seven years of rising stocks and a steadily improving economy hasn't been enough to make them feel safe enough to dive back into the market.

The numbers bear this out: In 2007, 65% of adult Americans owned stocks, according to Gallup; in 2016, the number is down to just 52%, the lowest it has been in the 19-year history of the polling firm's survey. Considering that the market has tripled over the past seven years, that's remarkable -- human beings' tendency to focus on recent events and penchant for following the crowd usually mean that more people, not fewer, jump on the equity market train as stocks are rising.

That hasn't happened this time around. But you know that those on the sidelines have been tempted. They see everyone else's portfolios going up and no doubt want a piece of the action. But it seems to me that any time the momentum really starts to gain, and we get to the point where those who've been afraid of getting hurt again are about to come back, another mini-crisis pops up: the commodities bust, election uncertainty, interest rate hikes, the possible "Brexit". These are the hesitant looks we see -- or think we see -- in our dates' eyes that halt us in our tracks just as we're about to make our move.

For much of this bull run, the market has offered a curt "good night" to those who have hesitated, and then it has moved on quickly to dates with other more opportunistic investors, leaving the fearful behind. But over the past year and a half, that's changed. From Feb. 27, 2015 to June 2 of this year, the S&P 500 has moved just four hundredths of one percent (in the upward direction). Sure, it's been up and down over that stretch, but all in all, it's right back where it started. This is the equivalent of your date giving you a second chance -- the market turned to leave, took a few steps away, and then came back and is asking, "Soooo?"

Only, in this case, our "date" -- the stock market -- has had some time to address some red flags. For example, those interest rate hikes that were supposed to be the market's undoing? They started, and we have seen that the market has held up. The much-questioned economy -- the underlying engine of the stock market -- has pushed through concerns and continued to grow (albeit slowly). And the plunging commodities market seems to have stabilized. Given that valuations are somewhat high but not unreasonable, I think the market is offering an opportunity for investors who've been waiting on the sidelines to get in before the next leg up.

The Facts

Of course, I don't know for sure that jumping into the market now as opposed to waiting, say, 6 months or a year, will prove to be prudent. But here's what I do know:

-- Bull markets last a lot longer than bear markets, which tend to be short-lived. Since 1956, we've had nine full bear markets, and they've lasted an average of 14 months and included an S&P 500 decline of about 34%. The eight bull markets, including the current bull, have lasted an average of 58 months -- nearly five years -- and involved an average S&P gain of more than 140%.

-- It's incredibly hard to predict when bull markets will end. They can run for a long time after you think they've gotten long in the tooth. The 1990-2000 bull lasted almost ten years and included a gain of more than 400%.

-- Valuations are on the high side, yes. But for valuations themselves to be the cause of a bull's demise, they likely have to be much higher -- as was the case in 2000, when the S&P traded for more than 44 times average 10-year earnings. Today, the S&P's 10-year P/E is about 25.7 -- high, but nowhere near the sort of irrational exuberance we saw in 2000. (Indeed, how could the climate be one of "exuberance" when about half of Americans don't even own stocks?)

What we've seen over the past year-and-a-half is less of a correction in price than it is a correction in time; the market has paused to allow earnings and revenues -- which slumped over the past year in large part because of the struggles of energy companies -- to catch up to stocks. Standard & Poor's sees S&P 500 companies' earnings growing in Q2 and continuing on to an all-time high in Q3. If that's the case, you can bet that the market will move higher, and the chance to give the market a kiss at early-2015 prices will be gone. (Keep in mind that, if you've been sitting on the sidelines, you don't need to throw caution to the wind and go all-in on stocks. You can dollar-cost average in over a period of weeks or months if you are feeling cautious.)

In the end, there are always going to be reasons not to move in for the kiss. But I think many investors are hyperfocused on those reasons right now. In doing so, they're remaining paralyzed, sitting on the sidelines consumed by fear. It's easy to understand how that could happen to someone today, given the severity of the 2008 crash and Great Recession. But they shouldn't let that trauma color all of their decisions going forward. Focus on the facts and the cold, hard data -- not emotions.

When I look at the facts, I see a market with room left to run. To me, the bigger risk is not that the market will reject your advances if you make a move right now; it's that, five, ten, twenty years from now, you'll look back and wish you'd had the courage to pucker up.


The Fallen

As we rebalance the Validea Hot List, 6 stocks leave our portfolio. These include: Brocade Communications Systems, Inc. (BRCD), Gannett Co Inc (GCI), Foot Locker, Inc. (FL), Banco Macro Sa (Adr) (BMA), Universal Forest Products, Inc. (UFPI) and United Therapeutics Corporation (UTHR).

The Keepers

4 stocks remain in the portfolio. They are: Thor Industries, Inc. (THO), Anika Therapeutics Inc (ANIK), Comfort Systems Usa, Inc. (FIX) and Home Bancshares Inc (HOMB).

The New Additions

We are adding 6 stocks to the portfolio. These include: Valero Energy Corporation (VLO), Polaris Industries Inc. (PII), Dsw Inc. (DSW), Amerisafe, Inc. (AMSF), Caleres Inc (CAL) and Monster Beverage Corp (MNST).

Latest Changes

Additions  
VALERO ENERGY CORPORATION VLO
POLARIS INDUSTRIES INC. PII
DSW INC. DSW
AMERISAFE, INC. AMSF
CALERES INC CAL
MONSTER BEVERAGE CORP MNST
Deletions  
BROCADE COMMUNICATIONS SYSTEMS, INC. BRCD
GANNETT CO INC GCI
FOOT LOCKER, INC. FL
BANCO MACRO SA (ADR) BMA
UNIVERSAL FOREST PRODUCTS, INC. UFPI
UNITED THERAPEUTICS CORPORATION UTHR


Newcomers to the Validea Hot List

Caleres, Inc. (CAL): Formerly known as Brown Shoe Company, Inc., Caleres is a global footwear retailer and wholesaler. It operates through two segments: Famous Footwear and Brand Portfolio. The Famous Footwear segment includes Famous Footwear stores, as well as Famous.com, and is a family branded footwear retailer with around 1,038 stores. The Brand Portfolio segment offers retailers and consumers a portfolio of brands by designing, sourcing and marketing branded footwear for women and men, selling to wholesalers and consumers.

Caleres ($1 billion market cap) has taken in more than $2.5 billion in sales over the past year. My Peter Lynch-, Ken Fisher-, and Benjamin Graham-inspired models are high on its shares. For details about its fundamentals, see the "Detailed Stock Analysis" section.

Monster Beverage Corporation (MNST): This California-based firm makes energy drinks and alternative beverages under such names as Monster Energy, Java Monster, and Muscle Monster. It also has a partnership with the Coca-Cola Company, which is Monster's preferred global distribution partner and owns 16.7% of Monster.

Monster ($31 billion market cap) gets a 99% score from my Warren Buffett-based model and high marks from my Martin Zweig-based approach and Momentum Investor model. Scroll down to the "Detailed Stock Analysis" section to learn more about the stock.

DSW Inc.: This footwear retailer offers an assortment of shoes, handbags and accessories for women, men and children. The company operates over 470 DSW stores and dsw.com, shoe departments in approximately 280 Stein Mart stores and Steinmart.com, over 100 Gordmans stores and Gordmans.com, and one Frugal Fannie's store.

DSW ($1.7 billion market cap) has taken in more than $2.6 billion in sales over the past year. My Peter Lynch-, Ken Fisher-, and Benjamin Graham-inspired models are high on its shares. For details about its fundamentals, see the "Detailed Stock Analysis" section.

Polaris Industries (PII): The Minnesota-based company makes off-road vehicles (including all-terrain and side-by-side vehicles and snowmobiles) and on-road vehicles (including motorcycles and small electric vehicles). Its shares have struggled recently, but the $5.4-billion-market-cap firm has averaged a return on equity of 44.1% over the past decade, part of why it gets strong interest from my Warren Buffett-based model.

Polaris also gets high marks from my Peter Lynch- and Joel Greenblatt-based models. To read more about its fundamentals, check out the "Detailed Stock Analysis" section below.

Valero Energy Corp. (VLO): Valero produces transportation fuels, other petrochemical products, and power. Its refineries can produce everything from conventional and premium gasolines and diesel fuel, to jet fuel, to asphalt, petrochemicals and lubricants. It markets branded and unbranded refined products through approximately 7,400 outlets and owns 11 ethanol plants in the central plains region of the United States that primarily produce ethanol.

VLO ($26 billion market cap) gets strong interest from my Peter Lynch-based model. For details about its impressive fundamentals, scroll down to the "Detailed Stock Analysis" section.

Amerisafe, Inc. (AMSF): This insurance holding company provides workers' compensation insurance for small to mid-sized employers engaged in hazardous industries, principally construction, trucking, manufacturing, agriculture, and oil and gas. It has a $1.2 billion market cap and has taken in about $400 million in sales over the past year.

Amerisafe gets high marks from my Peter Lynch-, Martin Zweig-, 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

Brocade Communications Systems, Inc. (BRCD): Brocade announced that it has closed its $1.2 billion acquisition of Ruckus Wireless, TheStreet.com reported. The deal expands Brocade's portfolio of storage networking and IP networking solutions with the addition of high performance wireless hardware and software products. Ruckus serves about 70,000 enterprise, service provider, government and small business customers worldwide. Its Smart Wi-Fi platform delivers scalable, high-performance Wi-Fi with simplified control and management for on-premise and cloud-based Wi-Fi deployments, along with services for secure on-boarding, policy management, location services and analytics that enable new business opportunities.



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
HOMB 5/6/2016 6.0%
MNST 6/3/2016 TBD
ANIK 5/6/2016 8.4%
VLO 6/3/2016 TBD
AMSF 6/3/2016 TBD
CAL 6/3/2016 TBD
FIX 5/6/2016 3.1%
DSW 6/3/2016 TBD
PII 6/3/2016 TBD
THO 2/12/2016 30.5%


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

HOMB   |   MNST   |   ANIK   |   VLO   |   AMSF   |   CAL   |   FIX   |   DSW   |   PII   |   THO   |  

HOME BANCSHARES INC

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

Home BancShares, Inc. is a bank holding company. The Company is engaged in providing a range of commercial and retail banking, and related financial services to businesses, real estate developers and investors, individuals and municipalities through its community bank subsidiary, Centennial Bank (the Bank). The Company offers a range of products and services, including 24-hour Internet banking, mobile banking and voice response information, cash management, overdraft protection, direct deposit, safe deposit boxes, United States savings bonds and automatic account transfers. Cook Insurance Agency, Inc. is an independent insurance agency. Centennial Insurance Agency writes policies for commercial and personal lines of business, including insurance for property, casualty, life, health and employee benefits. The Centennial Bank trust department offers an array of trust services. These trust services is focused on personal trusts, corporate trusts and employee benefit trusts.


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. HOMB's profit margin of 33.38% passes this test.


RELATIVE STRENGTH: FAIL

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. Although HOMB's relative strength of 87 is below the acceptable level, yet it is very close. Keep an eye on the stock as it could move into the acceptable range.


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 HOMB (28.26% for EPS, and 25.51% for Sales) are good enough to pass.


INSIDER HOLDINGS: PASS

HOMB's insiders should own at least 10% (they own 14.43% ) 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: PASS

A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. HOMB's free cash flow of $2.29 per share passes this test.


PROFIT MARGIN CONSISTENCY: PASS

HOMB's profit margin has been consistent or even increasing over the past three years (Current year: 36.62%, Last year: 33.66%, Two years ago: 30.64%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.


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 HOMB's case.


CASH AND CASH EQUIVALENTS: PASS

HOMB's level of cash $111.3 million passes this criteria. If a company is a cash generator, like HOMB, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.


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

The "Fool Ratio" is an extremely important aspect of this analysis. The methodology says consider holding the shares when the company's Fool Ratio is greater than 0.65 (HOMB's is 0.65), but initial purchases in this range are unfavorable.

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

AVERAGE SHARES OUTSTANDING: PASS

HOMB has not been significantly increasing the number of shares outstanding within recent years which is a good sign. HOMB currently has 70.0 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: PASS

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. HOMB's sales of $398.8 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". HOMB passes the sales test.


DAILY DOLLAR VOLUME: PASS

HOMB passes the Daily Dollar Volume (DDV of $10.3 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. HOMB with a price of $44.11 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

HOMB's income tax paid expressed as a percentage of pretax income this year was (36.75%) and last year (36.19%) 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.

MONSTER BEVERAGE CORP

Strategy: Growth Investor
Based on: Martin Zweig

Monster Beverage Corporation, based in Corona, California, is a holding company and conducts no operating business except through its consolidated subsidiaries. The Company's subsidiaries market and distribute energy drinks, including Monster Energy energy drinks, Monster Energy Extra Strength Nitrous Technology energy drinks, Java Monster non-carbonated coffee + energy drinks, M3 Monster Energy Super Concentrate energy drinks, Monster Rehab non-carbonated energy drinks with electrolytes, Muscle Monster Energy Shakes, Ubermonster energy drinks, NOS energy drinks, Full Throttle energy drinks, Burn energy drinks, Samurai energy drinks, Relentless energy drinks, Mother energy drinks, Power Play energy drinks, BU energy drinks, Nalu energy drinks, BPM energy drinks, Gladiator energy drinks, and Ultra energy drinks.


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. MNST's P/E is 42.74, 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. MNST's revenue growth is 12.64%, while it's earnings growth rate is 17.25%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, MNST 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 (8.5%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (6.6%) of the current year. Sales growth for the prior must be greater than the latter. For MNST 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. MNST's EPS ($0.79) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. MNST's EPS for this quarter last year ($0.02) pass this test.


POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS

The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. MNST's growth rate of 3,850.00% 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 MNST is 8.62%. This should be less than the growth rates for the 3 previous quarters which are 55.56%, 20.00% and -6.94%. MNST 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, 24.22%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 3,850.00%, (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, 3,850.00% must be greater than or equal to the historical growth which is 17.25%. MNST 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. MNST, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.53, 1.86, 1.95, 2.77 and 2.84, 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. MNST's long-term growth rate of 17.25%, 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. MNST's Debt/Equity (0.00%) is not considered high relative to its industry (144.34%) 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 MNST, this criterion has not been met (insider sell transactions are 161, while insiders buying number 65). 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.

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 21.43, 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: 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 (43.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (32.9%) of the current year. Sales growth for the prior must be greater than the latter. For ANIK 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. ANIK's EPS ($0.45) 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 ($0.23) 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 95.65% 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 ANIK is 18.84%. This should be less than the growth rates for the 3 previous quarters which are -15.00%, 37.50% and 41.18%. ANIK 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, 17.88%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 95.65%, (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, 95.65% must be greater than or equal to the historical growth which is 37.67%. ANIK would therefore pass this test.


EARNINGS PERSISTENCE: FAIL

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. 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 (148.09%) 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 $82,188.0 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 2.19 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 $8,086.0 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 8.40 (using the 3 year PE) passes this test.


PRICE/BOOK RATIO: PASS

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. VLO's Price/Book ratio is 1.27, while the P/E is 8.40. VLO passes the Price/Book test.

AMERISAFE, INC.

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

AMERISAFE, Inc. (AMERISAFE) is an insurance holding company. The Company provides workers' compensation insurance for small to mid-sized employers engaged in hazardous industries, principally construction, trucking, manufacturing, agriculture, and oil and gas. It is engaged in underwriting the workers' compensation exposures inherent in these industries. The Company provides coverage to employers under state and federal workers' compensation laws. The Company's workers' compensation insurance policies provide benefits to injured employees for, temporary or permanent disability, death and medical and hospital expenses. The Company provides safety services at employers' workplaces as a component of its underwriting process. It utilizes intensive claims management practices. The Company has over 8,000 voluntary business policyholders. It is licensed to provide workers' compensation insurance in approximately 50 states, the District of Columbia and the United States Virgin Islands.


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. AMSF's profit margin of 19.79% 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. AMSF, with a relative strength of 93, satisfies this test.


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

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for AMSF (60.76% for EPS, and 0.54% for Sales) are not good enough to pass.


INSIDER HOLDINGS: FAIL

AMSF's insiders should own at least 10% (they own 2.18%) of the company's outstanding shares. This does not satisfy the minimum requirement, and companies that do not pass this criteria are less attractive.


CASH FLOW FROM OPERATIONS: PASS

A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. AMSF's free cash flow of $1.22 per share passes this test.


PROFIT MARGIN CONSISTENCY: PASS

AMSF's profit margin has been consistent or even increasing over the past three years (Current year: 17.54%, Last year: 13.28%, Two years ago: 12.25%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.


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 AMSF's case.


CASH AND CASH EQUIVALENTS: FAIL

AMSF's level of cash and cash equivalents per sales, 17.28 %, does not pass this criteria of roughly 20%(a number we determined to be appropriate based on various examples). AMSF will have a more difficult time paying off debt (if it has any) or acquiring other companies than a company that passes this criteria.


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 AMSF was 3.15% last year, while for this year it is 0.00%. Since the AR to sales is decreasing by -3.15% the stock passes this criterion.


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

The "Fool Ratio" is an extremely important aspect of this analysis. If the company's Fool Ratio is between 0.5 and 0.65 (AMSF's is 0.58), the company demonstrates excellence in its fundamentals and have soundly beat the earnings estimates. AMSF passes this test.

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

AVERAGE SHARES OUTSTANDING: PASS

AMSF has not been significantly increasing the number of shares outstanding within recent years which is a good sign. AMSF currently has 19.0 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: PASS

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. AMSF's sales of $402.2 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". AMSF passes the sales test.


DAILY DOLLAR VOLUME: PASS

AMSF passes the Daily Dollar Volume (DDV of $6.2 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. AMSF with a price of $62.12 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

AMSF's income tax paid expressed as a percentage of pretax income this year was (30.21%) and last year (27.23%) 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.

CALERES INC

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

Caleres, Inc., formerly Brown Shoe Company, Inc., is a global footwear retailer and wholesaler. The Company is engaged in the operation of retail shoe stores and e-commerce Websites, as well as the design, sourcing and marketing of footwear for women and men. It operates through two segments: Famous Footwear, which includes its Famous Footwear stores and Famous.com, and Brand Portfolio, which offers retailers and consumers a portfolio of brands from its Healthy Living and Contemporary Fashion platforms. It operates approximately 1,210 retail shoe stores in the United States, Canada and Guam. It offers brands, including Nike, Skechers, Converse, Vans, adidas, Sperry, New Balance, Asics, Bearpaw and Sof Sole. It also offers Company-owned and licensed brands, including LifeStride, Dr. Scholl's, Naturalizer, Fergalicious and Carlos by Carlos Santana. Through its Brand Portfolio segment, it also designs, sources and markets footwear to retail stores domestically and internationally.


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. CAL's P/S of 0.43 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors.


TOTAL DEBT/EQUITY RATIO: PASS

Less debt equals less risk according to this methodology. CAL's Debt/Equity of 32.40% is acceptable, thus passing the test.


PRICE/RESEARCH RATIO: PASS

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


PRELIMINARY GRADE: Some Interest in CAL At this Point

Is CAL a "Super Stock"? NO


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.CAL's P/S ratio of 0.43 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors.


LONG-TERM EPS GROWTH RATE: PASS

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. CAL's inflation adjusted EPS growth rate of 43.60% passes the test.


FREE CASH PER SHARE: PASS

This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. CAL's free cash per share of 1.30 passes this criterion.


THREE YEAR AVERAGE NET PROFIT MARGIN: FAIL

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. CAL, whose three year net profit margin averages 2.63%, fails this evaluation.

COMFORT SYSTEMS USA, INC.

Strategy: Growth Investor
Based on: Martin Zweig

Comfort Systems USA, Inc. is a provider of mechanical contracting services, which principally includes heating, ventilation and air conditioning (HVAC), plumbing, piping and controls, as well as off-site construction, electrical, monitoring and fire protection. It installs, maintains and repairs products and systems throughout its approximately 35 operating units in 81 cities and 89 locations throughout the United States. It operates primarily in the commercial, industrial and institutional HVAC markets and offers services for the industrial, healthcare, education, office, technology, retail and government facilities. It provides a range of construction, renovation, expansion, maintenance, repair and replacement services for mechanical and related systems in commercial, industrial and institutional properties. Its installation business related to newly constructed facilities involves the design, engineering, integration, installation and start-up of mechanical and related systems.


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. FIX's P/E is 22.55, 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. FIX's revenue growth is 7.04%, while it's earnings growth rate is 23.45%, based on the average of the 3 and 5 year historical eps growth rates. Therefore, FIX 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 (4.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (7.7%) of the current year. Sales growth for the prior must be greater than the latter. For FIX 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. FIX's EPS ($0.26) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. FIX'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. FIX's growth rate of 85.71% 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 FIX is 11.72%. This should be less than the growth rates for the 3 previous quarters, which are 191.67%, 130.00%, and 25.00%. FIX passes this test, which means that it has good, reasonably steady earnings.


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


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

If the growth rate of the prior three quarter's earnings, 93.33%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 85.71%, (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 FIX is 85.7%, and it would therefore pass this test.


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

The EPS growth rate for the current quarter, 85.71% must be greater than or equal to the historical growth which is 23.45%. FIX would therefore pass this test.


EARNINGS PERSISTENCE: FAIL

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. FIX, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were -1.02, 0.62, 0.73, 0.61, and 1.30, 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. FIX's long-term growth rate of 23.45%, based on the average of the 3 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. FIX's Debt/Equity (16.14%) is not considered high relative to its industry (59.88%) 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 FIX, this criterion has not been met (insider sell transactions are 161, while insiders buying number 86). 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.

DSW INC.

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

DSW Inc. is a footwear retailer. The Company offers assortment of shoes, handbags and accessories for women, men and children. The Company operates through two segments: the DSW segment and the Affiliated Business Group (ABG) segment. The DSW segment includes DSW stores and dsw.com. The Company, through its ABG segment, partners with approximately three other retailers to help build and optimize their footwear businesses. The Company operates over 470 DSW stores, dsw.com and shoe departments in approximately 280 Stein Mart stores and Steinmart.com, over 100 Gordmans stores and Gordmans.com, and approximately one Frugal Fannie's store. Its DSW stores average approximately 21,000 square feet and carry over 21,500 pairs of shoes. In addition, it offers DSW Rewards program, through which members earn points towards certificates every time they purchase.


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. DSW's P/S of 0.66 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors.


TOTAL DEBT/EQUITY RATIO: PASS

Less debt equals less risk according to this methodology. DSW's Debt/Equity of 0.00% is exceptional, thus passing the test.


PRICE/RESEARCH RATIO: PASS

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


PRELIMINARY GRADE: Some Interest in DSW At this Point

Is DSW a "Super Stock"? NO


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.DSW's P/S ratio of 0.66 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors.


LONG-TERM EPS GROWTH RATE: FAIL

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. DSW's inflation adjusted EPS growth rate of 8.97% fails the test.


FREE CASH PER SHARE: PASS

This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. DSW's free cash per share of 0.78 passes this criterion.


THREE YEAR AVERAGE NET PROFIT MARGIN: PASS

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. DSW, whose three year net profit margin averages 5.91%, passes this evaluation.

POLARIS INDUSTRIES INC.

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

Polaris Industries Inc. (Polaris) designs, engineers and manufactures off-road vehicles (ORV), including all-terrain vehicles (ATV) and side-by-side vehicles for recreational and utility use, snowmobiles, motorcycles and global adjacent markets vehicles, together with the related parts, garments and accessories. The Company's segments are ORV/Snowmobiles, Motorcycles and Global Adjacent Markets. These products are sold through dealers and distributors located in the United States, Canada, Western Europe, Australia and Mexico. Its ORVs include Sportsman ATVs, Polaris ACE, RANGER, RZR and Polaris GENERAL side-by-side vehicles. It produces snowmobiles, ranging from youth models to utility and economy models to performance and competition models. Its Motorcycles segment consists of Victory, Indian motorcycles and the moto-roadster, Slingshot. It offers products in the light-duty hauling, people mover and urban/suburban commuting sub-sectors of the Work and Transportation industry.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (13.62) relative to the growth rate (20.50%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for PII (0.66) makes it favorable.


SALES AND P/E RATIO: PASS

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. PII, whose sales are $4,668.9 million, needs to have a P/E below 40 to pass this criterion. PII's P/E of (13.62) 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 PII was 12.63% last year, while for this year it is 15.04%. 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 (2.42%) 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 PII is 20.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for PII (57.19%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for PII should be good enough to compensate.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for PII (0.90%) 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 PII (-6.71%) 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.

THOR INDUSTRIES, INC.

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

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.


MARKET CAP: PASS

The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. THO, with a market cap of $3,396 million, passes this criterion.


EARNINGS PER SHARE PERSISTENCE: PASS

The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. THO, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.66, 2.07, 2.86, 3.29 and 3.79, passes this test.


PRICE/SALES RATIO: PASS

The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. THO's Price/Sales ratio of 0.80, based on trailing 12 month sales, passes this criterion.


RELATIVE STRENGTH: PASS

The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. THO, whose relative strength is 71, is in the top 50 and would pass this last criterion.


Watch List

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

Ticker Company Name Current
Score
BMA BANCO MACRO SA (ADR) 73%
EGOV NIC INC. 71%
UFPI UNIVERSAL FOREST PRODUCTS, INC. 61%
BWLD BUFFALO WILD WINGS 61%
WLK WESTLAKE CHEMICAL CORPORATION 58%
DW DREW INDUSTRIES, INC. 57%
SIGI SELECTIVE INSURANCE GROUP 56%
SAFM SANDERSON FARMS, INC. 55%
SANM SANMINA CORP 54%
GWB GREAT WESTERN BANCORP INC 53%



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