The Economy

From the continuing oil price plunge to stellar job growth to the first interest rate hikes in nearly a decade, 2015 has been a rather wild -- though solid -- year for the US economy. And as the New Year approaches, the data overall remains positive

New claims for unemployment have fallen since our last newsletter, and are now about 6% below where they were a year ago. Continuing claims, the data for which lag new claims by a week, also fell and are 8% below year-ago levels.

New home sales followed up a strong October with a solid November, rising 4.3%, according to the Census Bureau. That put them about 9% above where they were a year ago. Median sales prices jumped 6.3% and are about 0.8% above last year's level.

Personal income rose 0.3% in November, meanwhile, according to the Commerce Department, a solid increase.. Real disposable personal income rose 0.2%, while real personal consumption expenditures increased 0.3% . Amid all of this, the personal savings rate fell by a tenth of a percentage point, but remains a very strong 5.5%.

Gas prices keep on falling, as the latest supply data shows that a glut in oil remains. A gallon of regular unleaded on average cost $2.00 on December 30, down from $2.04 a month earlier, according to AAA. That's about 12% below where it was a year ago.

Since our last newsletter, the S&P 500 returned -0.5%, while the Hot List returned -0.5%. So far in 2015, the portfolio has returned -11.8% vs. 0.2% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 185.4% vs. the S&P's 106.2% gain.

Portfolio Update: Minor Gains to End Year

It has been a rough year for the Hot List, but the portfolio has been winding up 2015 in decent form. Six of its 10 holdings have been in the black since our last newsletter, with performance data as of the market close on Tuesday.

Leading the way was Sanderson Farms (SAFM) the Mississippi-based poultry producer, whose shares rose nearly 7%. The increase, while welcome, was a lesson in why it is so hard to predict the market in the short term. Sanderson announced fourth-quarter earnings that actually lagged Wall Street estimates, as did its revenues. Still, investors seemed pleased that it did not fall even shorter of those estimates, as shares jumped.

Another solid gainer was Polaris Industries (PII), the recreational vehicle maker. Polaris' shares have struggled in recent months, but they rose about 3% since our last newsletter. RV motorhome maker Thor Industries was another winner, also gaining about 3%.

On the down side, I/T firm ePlus Inc. (PLUS) fell about 4%, while petroleum refiner Tesoro (TSO) slipped about 3%. There didn't seem to be a major news catalyst behind either decline. Tesoro is certainly getting impacted by the oil price declines, so that likely played some role in its weakness. But all sorts of short-term trading goes on at the end of the year for reasons that have little to do with a stock's true value, so it's hard to read too much into our winners' success and losers' shortcomings over the past few weeks.

As we head into 2016, we'll continue to stick to the strategies that have generated strong long-term performance for us. While 2015 has been a rough year for the Hot List, we expect the portfolio to outperform the market going forward, and widen the significant lead it has on the S&P 500 since its mid-2003 inception.

Have a happy, healthy New Year, and we'll see you in 2016.

Guru Spotlight: Greenblatt On Why You Shouldn't Veto A "Magical" Approach

In theory, a winning investment strategy is a bit like a beautiful, secluded tropical island: Don't let too many people know about it, or else it will be ruined.

Well, a decade ago, Joel Greenblatt told the world about a highly successful strategy that, until then, had been the equivalent of a beautiful, secluded tropical island. And guess what? Investment "tourists" have yet to ruin it.

In his Little Book that Beats the Market, Greenblatt outlined a remarkably simple, two-step method for producing great returns. The "Magic Formula", as he called it, looked for stocks with a high earnings yield (earnings before interest and taxes/enterprise value) and a high return on capital (EBIT/tangible capital employed). That's it.

Greenblatt's back-testing found that focusing on stocks that rated highly in those areas would have produced a remarkable 30.8 percent return from 1988 through 2004, more than doubling the S&P 500's 12.4 percent return during that period. Greenblatt also posted impressive numbers in his money management experience, with his hedge fund, Gotham Capital, producing returns of 40 percent per year over a span of more than two decades.

Not long after Greenblatt published his book, I created my Greenblatt-inspired Guru Strategy, which uses the same two variables to pick stocks. Since its late-2005 inception, a 10-stock portfolio picked using this model has gained 90.5% compared to 64.3% for the S&P 500. That's an annual gain 6.6% vs. 5.0% for the index.

Why has this strategy continued to work even after Greenblatt disclosed it? To understand the answer, you first have to understand why it theoretically should not work. Here's the logic: Once an investment concept becomes well-known, it should stop working. The more investors who move to exploit the inefficiency, the higher the prices of the stocks it targets would become, and the less lucrative their future returns. Much like hordes of loud, fanny-pack-clad tourists ruin that tropical island paradise, hordes of investors ruin a good strategy's stellar returns.

But that's theory -- efficient market theory. It assumes that humans are rational, and decades and decades of market history show that they are not. Most people, whether individual investors or professional fund managers, don't buy stocks based on cold, hard fundamentals and financials. Instead they follow the crowd, or trying to capitalize on macroeconomic factors, or base their decisions on their biased evaluations of a company's products and services. And if they try to follow a fundamental-based strategy, they often end up ditching it as soon as it hits short-term problems (which any strategy will do), as they can't take the emotional toll of staying the course when things aren't going well. Or, they alter the strategy by vetoing some of its picks that they find too anxiety provoking.

In fact, Greenblatt found that over a two-year period investors who were able to pick and choose between stocks his quantitative strategy approved of (and pick the timing of their trades) fared far worse than those who had their buying and selling done on automated fixed intervals, with no ability to veto picks the formula recommended. While the latter beat the market by 21.4 percentage points, the former actually lagged the market by about 3 points. One big reason: They tended to miss out on many of the best performing stocks -- beaten-down value plays that were the subject of scary headlines.

Pick & Choose (& Lose)

Screen Shot 2015-12-30 at 10.38.19 PM

Source: Morningstar.com



Successful, publicly disclosed strategies can continue to work over the long term if they incorporate a diverse set of variables that measure real and timeless concepts like profitability, debt levels, and valuation -- if, that is, you stick to them through the inevitable short-term ups and downs, as their creators no doubt intended. I believe this not because it sounds good or makes sense theoretically. I believe it instead because I have seen our guru-inspired strategies have great success over the past dozen years. Such strategies won't work on every pick and they won't work all the time. But neither will new, successful strategies -- I guarantee you that the most successful new stock-picking method of 2015 will stumble at some point. The key is to pick a strategy whose variables analyze important, fundamental business concepts -- profitability, debt levels, revenue growth -- and which buys at attractive prices stocks that rate highly in those areas. If you employ those types of strategies in an unemotional, systematic manner, you should continue to enjoy success long after the strategies are well-known.



News about Validea Hot List Stocks

Sanderson Farms Inc. (SAFM): Sanderson reported fiscal fourth-quarter profit of $27.4 million, or $1.22 per share. The results fell short of Wall Street expectations of $1.50 per share. The poultry producer posted revenue of $679.6 million in the period. For the year, the company reported profit of $216 million, or $9.52 per share. The per-share result was 12% below year-ago levels. Revenue for the full year was $2.8 billion, up 1%.

Cal-Maine Foods Inc. (CALM): On Dec. 23, Cal-Maine reported fiscal second-quarter earnings of $109.2 million, or $2.26 per share. The egg producer posted revenue of $546 million in the period. Earnings and revenues were a bit below Wall Street expectations, however, so shares fell on the news.

The Next Issue

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

Portfolio Holdings
Ticker Date Added Return
PII 10/23/2015 -21.8%
VLO 11/20/2015 -0.6%
TSO 11/20/2015 -8.9%
SAFM 1/16/2015 -2.1%
PLUS 12/18/2015 -4.0%
NOV 12/18/2015 1.4%
THO 12/18/2015 4.1%
CALM 11/20/2015 -16.3%
BMA 11/20/2015 -15.1%
SYNT 11/20/2015 -3.0%


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

PII   |   VLO   |   TSO   |   SAFM   |   PLUS   |   NOV   |   THO   |   CALM   |   BMA   |   SYNT   |  

POLARIS INDUSTRIES INC.

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

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 small vehicles (SV). These products are sold through dealers and distributors located in the United States, Canada and Europe. The Company's ORVs include core ATVs, and RANGER and RZR side-by-side vehicles. The Company produces a range of snowmobiles, consisting of 32 models, ranging from youth models to utility and economy models to performance and competition models. Polaris' Motorcycles division consists of Victory, Indian motorcycles and three-wheel roadster motorcycle, Slingshot. The Company offer products in the light-duty hauling, people mover and urban/suburban commuting sub-sectors of the small vehicles industry. The Company produces or supplies a range of replacement parts and accessories for its product lines.

Detailed Analysis


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. PII, with a market cap of $5,658 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. PII, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 2.14, 3.20, 4.40, 5.40 and 6.65, 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. PII's Price/Sales ratio of 1.16, based on trailing 12 month sales, passes this criterion.


RELATIVE STRENGTH: FAIL

The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. PII has a relative strength of 27. This does not pass the final criterion. As a result, this methodology would not consider the stock even though it passed the previous three criteria.


VALERO ENERGY CORPORATION

Strategy: Contrarian Investor
Based on: David Dreman

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

Detailed Analysis

MARKET CAP: PASS

Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. VLO has a market cap of $34,466 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. VLO's EPS for the past 2 quarters, (from earliest to most recent quarter) 2.64, 2.79 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. VLO passes this test as its EPS growth rate over the past 6 months (49.19%) has beaten that of the S&P (3.85%). VLO's estimated EPS growth for the current year is (24.82%), which indicates the company is expected to experience positive earnings growth. As a result, VLO passes this test.


This methodology would utilize four separate criteria to determine if VLO 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. VLO's P/E of 7.53, based on trailing 12 month earnings, meets the bottom 20% criterion (below 11.74), 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. VLO's P/CF of 5.14 meets the bottom 20% criterion (below 6.01) 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. VLO's P/B is currently 1.62, which does not meet the bottom 20% criterion (below 0.89), 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%). VLO's P/D of 35.84 does not meet the bottom 20% criterion (below 17.33), and it therefore fails this test.


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


CURRENT RATIO: PASS

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.34] or greater than 2). This is one identifier of financially strong companies, according to this methodology. VLO's current ratio of 2.03 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 VLO is 15.50%, while its historical payout ratio has been 18.46%. 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 16.71%, and would consider anything over 27% to be staggering. The ROE for VLO of 23.14% is high enough to pass this criterion.


PRE-TAX PROFIT MARGINS: FAIL

This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. VLO's pre-tax profit margin is 7.35%, thus failing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. VLO's current yield is 2.79%, while the market yield is 2.74%. VLO fails this test.


LOOK AT THE TOTAL DEBT/EQUITY: PASS

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 46.58%. VLO's Total Debt/Equity of 34.62% is considered acceptable.


TESORO CORPORATION

Strategy: Contrarian Investor
Based on: David Dreman

Tesoro Corporation is an independent petroleum refining and marketing company. Through its subsidiaries, the Company primarily transports crude oil and manufactures, transports and sells transportation fuels. The Company operates through three business segments: Refining operating segment, which owns and perates six petroleum refineries with a combined crude oil capacity of 850 thousand barrels per day (Mbpd) located in the western United States and sells transportation fuels to a variety of customers; TLLP, a publicly traded limited partnership, which includes certain crude oil and natural gas gathering assets, natural gas processing and crude oil and refined products terminalling, transportation and storage assets, and Retail operating segment, which sells transportation fuels in approximately 16 states through a network of approximately 2,267 retail stations under the ARCO, Shell, Exxon, Mobil, USA Gasoline and Tesoro brands.

Detailed Analysis

MARKET CAP: PASS

Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. TSO has a market cap of $12,554 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. TSO's EPS for the past 2 quarters, (from earliest to most recent quarter) 4.64, 6.13 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. TSO passes this test as its EPS growth rate over the past 6 months (437.71%) has beaten that of the S&P (3.85%). TSO's estimated EPS growth for the current year is (114.09%), which indicates the company is expected to experience positive earnings growth. As a result, TSO passes this test.


This methodology would utilize four separate criteria to determine if TSO 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. TSO's P/E of 7.87, based on trailing 12 month earnings, meets the bottom 20% criterion (below 11.74), 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. TSO's P/CF of 5.07 meets the bottom 20% criterion (below 6.01) 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. TSO's P/B is currently 2.35, which does not meet the bottom 20% criterion (below 0.89), 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%). TSO's P/D of 52.08 does not meet the bottom 20% criterion (below 17.33), and it therefore fails this test.


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


CURRENT RATIO: PASS

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.34] or greater than 2). This is one identifier of financially strong companies, according to this methodology. TSO's current ratio of 1.63 passes the test.


PAYOUT RATIO: FAIL

A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for TSO is 12.40%, while its historical payout ratio has been 10.27%. Therefore, it fails the payout criterion.


RETURN ON EQUITY: PASS

The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 16.71%, and would consider anything over 27% to be staggering. The ROE for TSO of 33.33% 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. TSO's pre-tax profit margin is 8.96%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. TSO's current yield is 1.92%, while the market yield is 2.74%. TSO fails this test.


LOOK AT THE TOTAL DEBT/EQUITY: FAIL

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20%. TSO's Total Debt/Equity of 70.60% is not acceptable.


SANDERSON FARMS, INC.

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

Sanderson Farms, Inc. is a poultry processing company which is engaged in the production, processing, marketing and distribution of fresh and frozen chicken and other prepared chicken items. In addition, the Company is engaged in the processing, marketing and distribution of prepared chicken through its wholly owned subsidiary, Sanderson Farms, Inc. (Foods Division). It produces a range of processed chicken products and prepared chicken items. It sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, under the Sanderson Farms brand name to retailers, distributors, and casual dining operators in the south-eastern, south-western, north-eastern and western United States and to customers who resell frozen chicken into export markets. During the fiscal year ended October 31, 2013 (fiscal 2013), it processed 452 million chickens, or over 3.0 billion dressed pounds.

Detailed Analysis


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. SAFM's P/S of 0.64 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. SAFM's Debt/Equity of 0.97% 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. SAFM 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 SAFM At this Point

Is SAFM a "Super Stock"? YES


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.SAFM's P/S ratio of 0.64 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%. SAFM's inflation adjusted EPS growth rate of 31.72% 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. SAFM's free cash per share of 4.88 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. SAFM, whose three year net profit margin averages 7.18%, passes this evaluation.



EPLUS INC.

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

ePlus inc. is an integrator of technology solutions for information technology (IT) lifecycle management. The Company is engaged in selling, leasing, financing, and managing information technology and other assets. The Company operates in two segments: technology and financing. The Company's technology segment includes sales of information technology products, third-party software, third-party maintenance, advanced professional and managed services and its software to commercial, state and local governments and government contractors. The financing segment consists of the financing of IT equipment, software and related services to commercial, state and local governments, and government contractors. The Company designs, implements and provides an array of IT solutions from multiple IT vendors, including Check Point, Cisco Systems, Dell, EMC, FireEye, F5 Networks, Hewlett-Packard, Juniper, McAfee, NetApp, Nimble, Oracle, Palo Alto Networks, Pure Storage and VMware, among others.

Detailed Analysis


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. PLUS, with a market cap of $721 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. PLUS, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 2.78, 2.79, 4.32, 4.37 and 6.19, 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. PLUS's Price/Sales ratio of 0.61, 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. PLUS, whose relative strength is 87, is in the top 50 and would pass this last criterion.


NATIONAL-OILWELL VARCO, INC.

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

National Oilwell Varco, Inc. (NOV) is engaged in providing design, manufacture and sale of equipment and components used in oil and gas drilling, completion and production operations. The Company also provides oilfield services to the upstream oil and gas industry. The Company operates through four segments: Rig Systems, Rig Aftermarket, Wellbore Technologies, and Completion & Production Solutions. Its Rig Systems segment makes and supports the capital equipment and integrated systems needed to drill oil and gas wells on land and offshore. Its Rig Aftermarket segment provides aftermarket products and services to support land and offshore rigs, and drilling rig components manufactured by the Company's Rig Systems segment. Its Wellbore Technologies segment sells and rents solids control equipment; and provides solids control, waste management and drilling fluids services. Its Completion & Production Solutions segment provides technologies for well completions and oil and gas production.

Detailed Analysis


DETERMINE THE CLASSIFICATION:

According to this methodology, NOV is a "Slow Grower", based on its single digit earnings growth of 8.69%, based on the average of the 3, 4 and 5 year historical eps growth rates.


SALES: PASS

NOV would fall into the "Dividend Payers" category according to this methodology. The first requirement of a Slow Grower is that its sales exceed one billion. NOV's sales are $17,744 million. It passes the test.


INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for NOV was 37.16% last year, while for this year it is 33.39%. Since inventory to sales has decreased from last year by -3.77%, NOV passes this test.


YIELD COMPARED TO THE S&P 500: PASS

This methodology also maintains that the Yield of a "Slow Grower" should be high, which includes being higher than the S&P average (currently 2.48%), and at least 3%. This yield is required because dividends are the main reason for investing in "Slow Growers". The yield for NOV is 5.45% so it passes this test.


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

This methodology would consider the Yield-adjusted P/E/G ratio for NOV of 0.72, based on the average of the 3, 4 and 5 year historical eps growth rates, to be good.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for NOV (21.97%) to be acceptable (equity is three to ten times debt). This ratio is one quick way to determine the financial strength of the company.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for NOV (8.36%) 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 NOV (-3.46%) 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: P/E/Growth Investor
Based on: Peter Lynch

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

Detailed Analysis


DETERMINE THE CLASSIFICATION:

THO is considered a "True Stalwart", according to this methodology, as its earnings growth of 19.29% lies within a moderate 10%-19% range and its annual sales of $4,115 million are greater than the multi billion dollar level. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. THO is attractive if THO can hold its own during a recession.


INVENTORY TO SALES: PASS

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


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

The Yield-adjusted P/E/G ratio for THO (0.67), based on the average of the 3, 4 and 5 year historical eps growth rates, is O.K.


EARNINGS PER SHARE: PASS

The EPS for a stalwart company must be positive. THO's EPS ($4.03) would satisfy this criterion.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for THO (0.00%) to be wonderfully low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for THO (4.85%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for THO (6.04%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


CAL-MAINE FOODS INC

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

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.

Detailed Analysis


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratio between .75 and 1.5 are good values. CALM's P/S ratio of 1.16 based on trailing 12 month sales, falls within the "good values" range for non-cyclical companies and is considered attractive.


TOTAL DEBT/EQUITY RATIO: PASS

Less debt equals less risk according to this methodology. CALM's Debt/Equity of 3.30% 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. CALM 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 CALM At this Point

Is CALM a "Super Stock"? NO


PRICE/SALES RATIO: FAIL

The prospective company should have a low Price/Sales ratio. To be considered a "Super Stock", non-cyclical (non-Smokestack) companies should have Price/Sales ratios below .75. However, CALM, who has a P/S of 1.16, does not fall within the "Super Stock" range. It does fall between 0.75 and 1.5, which is considered the "good values" range for non-cyclical companies. Nonetheless, it does not pass this "Super Stock" criterion.


LONG-TERM EPS GROWTH RATE: PASS

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. CALM's inflation adjusted EPS growth rate of 19.95% 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. CALM's free cash per share of 1.32 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. CALM, whose three year net profit margin averages 7.24%, passes this evaluation.



BANCO MACRO SA (ADR)

Strategy: Patient Investor
Based on: Warren Buffett

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.

Detailed Analysis

STAGE 1: "Is this a Buffett type company?"

A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage.


LOOK FOR EARNINGS PREDICTABILITY: PASS

Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.08, 0.06, 0.06, 0.10, 0.17, 0.15, 0.21, 0.27, 0.43, 0.62. Buffett would consider BMA's earnings predictable, although earnings have declined 2 time(s) in the past seven years, with the most recent decline 5 years ago. The dips have totaled 36.8%. BMA's long term historical EPS growth rate is 38.4%, based on the average of the 3, 4 and 5 year historical eps growth rates.


LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: PASS

Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for BMA, over the last ten years, is 23.8%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 30.5%, 15.7%, 13.9%, 22.7%, 28.7%, 20.3%, 24.3%, 24.3%, 27.8%, 29.7%, and the average ROE over the last 3 years is 27.3%, thus passing this criterion.


LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON ASSETS: PASS

Buffett also requires, for financial companies, that the average Return On Assets (ROA) be at least 1% and consistent. Return On Assets is defined as the net earnings of the business divided by the total assets of the business. The average ROA for BMA, over the last ten years, is 3.3%, which is high enough to pass. It is not enough that the average be at least 1%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROA must be at least 1% for Buffett to feel comfortable that the ROA is consistent. The ROA for the last 10 years, from earliest to latest, is 4.8%, 2.5%, 1.9%, 2.9%, 3.6%, 2.5%, 2.8%, 3.1%, 4.0%, 4.6%, thus passing this criterion.


LOOK AT CAPITAL EXPENDITURES: PASS

Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. BMA's free cash flow per share of $4.78 is positive, indicating that the company is generating more cash that it is consuming. This is a favorable sign, and so the company passes this criterion.


LOOK AT MANAGEMENT'S USE OF RETAINED EARNINGS: PASS

Buffett likes to see if management has spent retained earnings in a way that benefits shareholders. To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $1.95 and compares it to the gain in EPS over the same period of $0.54. BMA's management has proven it can earn shareholders a 27.7% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work.


HAS THE COMPANY BEEN BUYING BACK SHARES: BONUS PASS

Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. BMA's shares outstanding have fallen over the past five years from 583,250,000 to 58,000,000, thus passing this criterion. This is a bonus criterion and will not adversely affect the ability of a stock to pass the strategy as a whole if it is failed.

The preceding concludes Buffett's qualitative analysis. If and when he gets positive responses to all the above criteria, he would then proceed with a price analysis. The price analysis will determine whether or not the stock should be bought. The following is how he would evaluate BMA quantitatively.

STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return.


CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail]

Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $4.86 and divide it by the current market price of $57.75. An investor, purchasing BMA, could expect to receive a 8.42% initial rate of return. Furthermore, he or she could expect the rate to increase 38.4% per year, based on the average of the 3, 4 and 5 year historical eps growth rates, as this is how fast earnings are growing.


COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: PASS

Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 3.15%. Compare this with BMA's initial yield of 8.42%, which will expand at an annual rate of 38.4%, based on the average of the 3, 4 and 5 year historical eps growth rates. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding.


CALCULATE THE FUTURE EPS: [No Pass/Fail]

BMA currently has a book value of $962.50. It is safe to say that if BMA can preserve its average rate of return on equity of 23.8% and continues to retain 90.94% of its earnings, it will be able to sustain an earnings growth rate of 21.6% and it will have a book value of $6,820.34 in ten years. If it can still earn 23.8% on equity in ten years, then expected EPS will be $1,622.22.


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

Now take the expected future EPS of $1,622.22 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (11.9) (5 year average P/E in this case), which is 5.6 and you get BMA's projected future stock price of $9,084.42.


CALCULATE THE EXPECTED RATE OF RETURN BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]

Now add in the total expected dividend pool to be paid over the next ten years, which is $39.24. This gives you a total dollar amount of $9,123.66. These numbers indicate that one could expect to make a 65.9% average annual return on BMA's stock at the present time. Buffett would consider this an absolutely fantastic expected return.


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

If you take the EPS growth of 38.4%, based on the average of the 3, 4 and 5 year historical eps growth rates, you can project EPS in ten years to be $124.92. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (11.9) (5 year average P/E in this case), which is 5.6. This equals the future stock price of $699.56. Add in the total expected dividend pool of $39.24 to get a total dollar amount of $738.80.


CALCULATE THE EXPECTED RETURN USING THE AVERAGE EPS GROWTH METHOD: [No Pass/Fail]

Now you can figure out your expected return based on a current price of $57.75 and the future expected stock price, including the dividend pool, of $738.80. If you were to invest in BMA at this time, you could expect a 29.03% average annual return on your money. Buffett would consider this an exceptional return.


LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: PASS

Based on the two different methods, you could expect an annual compounding rate of return somewhere between 29.0% and 65.9%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 47.5% on BMA stock for the next ten years, based on the current fundamentals. Buffett would consider this an exceptional return, thus passing the criterion.


SYNTEL, INC.

Strategy: Growth Investor
Based on: Martin Zweig

Syntel, Inc. (Syntel) is a provider of digital transformation, information technology (IT) and knowledge process outsourcing (KPO) services. Syntel operates through five segments: Banking and Financial Services, Healthcare and Life Sciences, Insurance, Retail, Logistics and Telecom, and Manufacturing. The Banking and Financial Services segment serves financial institutions around the world. The Healthcare and Life Sciences segment serves various companies in the healthcare industry. The Insurance segment serves property and casualty insurers, insurance brokers, personal, commercial, life and retirement insurance service providers. The Retail, Logistics and Telecom segment serves a range of retailers and distributors, and clients in the logistics and telecom industry. The Manufacturing segment provides business consulting and technology services for industrial and automotive clients. The Company offers its products and services under the Syntel brand.

Detailed Analysis


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. SYNT's P/E is 15.61, 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. SYNT's revenue growth is 14.48%, while it's earnings growth rate is 21.14%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, SYNT 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 (11.1%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (5.1%) of the current year. Sales growth for the prior must be greater than the latter. For SYNT 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. SYNT's EPS ($0.92) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. SYNT's EPS for this quarter last year ($0.73) 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. SYNT's growth rate of 26.03% 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 SYNT is 10.57%. This should be less than the growth rates for the 3 previous quarters which are 6.33%, -30.43% and 1.41%. SYNT 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, -6.85%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 26.03%, (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, 26.03% must be greater than or equal to the historical growth which is 21.14%. SYNT 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. SYNT, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.36, 1.47, 2.22, 2.62 and 2.97, 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. SYNT's long-term growth rate of 21.14%, 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. SYNT's Debt/Equity (12.12%) is not considered high relative to its industry (85.83%) 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 SYNT, this criterion has not been met (insider sell transactions are 161, while insiders buying number 9). 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
INTL INTL FCSTONE INC 85%
HRTG HERITAGE INSURANCE HOLDINGS INC 67%
SIMO SILICON MOTION TECHNOLOGY CORP. (ADR) 63%
AFSI AMTRUST FINANCIAL SERVICES INC 60%
BA BOEING CO 58%
TBI TRUEBLUE INC 56%
BOFI BOFI HOLDING, INC. 55%
MPC MARATHON PETROLEUM CORP 55%
LL LUMBER LIQUIDATORS HOLDINGS INC 52%
FNBC FIRST NBC BANK HOLDING COMPANY 48%



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