Guru Analysis
| Strategy: Growth Investor
Based on: Martin Zweig |
| NetEase, Inc. (NetEase) is a technology company. The Company operates an interactive online community in China and is a provider of Chinese language content and services through its online games, Internet media, e-mail, e-commerce and other businesses. The Company operates through three segments: Online Game Services; Advertising Services, and E-mail, E-commerce and Others. Its online games business primarily focuses on offering personal computer (PC)-client massively multi-player online role-playing games (PC-client MMORPGs), as well as mobile games to the Chinese market. The NetEase Websites provide Internet users with Chinese language online services centered over three core service categories, which include content, community and communication. Its online advertising offerings include banner advertising, direct e-mail, sponsored special events, games, contests and other activities. It offers free and fee-based premium e-mail services to its individual users and corporate users. |
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. NTES's P/E is 21.88, based on trailing 12 month earnings, while the current market PE is 24.00. Therefore, it passes the first test.
REVENUE GROWTH IN RELATION TO EPS GROWTH: PASS
Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. NTES's revenue growth is 48.70%, while it's earnings growth rate is 32.44%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, NTES passes this criterion.
SALES GROWTH RATE: FAIL
Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (3%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (35.5%) of the current year. Sales growth for the prior must be greater than the latter. For NTES 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. NTES's EPS ($2.87) pass this test.
QUARTERLY EARNINGS ONE YEAR AGO: PASS
The EPS for the quarter one year ago must be positive. NTES's EPS for this quarter last year ($0.17) 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. NTES's growth rate of 1,588.24% 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 NTES is 16.22%. This should be less than the growth rates for the 3 previous quarters which are 63.64%, 16.67% and 0.00%. NTES 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, 25.71%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 1,588.24%, (versus the same quarter one year ago) then the stock passes.
EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: PASS
The EPS growth rate for the current quarter, 1,588.24% must be greater than or equal to the historical growth which is 32.44%. NTES 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. NTES, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.17, 0.21, 0.22, 0.31 and 0.53, 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. NTES's long-term growth rate of 32.44%, 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. NTES's Debt/Equity (12.74%) is not considered high relative to its industry (99.31%) and passes this test. |
| Strategy: Growth Investor
Based on: Martin Zweig |
| LGI Homes, Inc. is a homebuilder and land developer. The Company is engaged in the design, construction, marketing and sale of new homes in markets in Texas, Arizona, Florida, Georgia, New Mexico, South Carolina, North Carolina, Colorado, Washington and Tennessee. The Company operates through five segments: the Texas division, the Southwest division, the Southeast division, the Florida division and the Northwest division. The Texas division includes homebuilding operations in Houston, Dallas/Fort Worth, San Antonio and Austin locations. The Southwest division includes homebuilding operations in Phoenix, Tucson, Albuquerque, Denver and Colorado Springs locations. The Southeast division includes homebuilding operations in Atlanta, Charlotte and Nashville locations. The Florida division includes homebuilding operations in Tampa, Orlando, Fort Myers and Jacksonville locations. The Northwest division includes homebuilding operations in Seattle location. |
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. LGIH's P/E is 14.49, based on trailing 12 month earnings, while the current market PE is 24.00. Therefore, it passes the first test.
REVENUE GROWTH IN RELATION TO EPS GROWTH: PASS
Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. LGIH's revenue growth is 76.43%, while it's earnings growth rate is 63.45%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, LGIH passes this criterion.
SALES GROWTH RATE: PASS
Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (69.2%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (45.6%) of the current year. Sales growth for the prior must be greater than the latter. For LGIH 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. LGIH's EPS ($1.40) pass this test.
QUARTERLY EARNINGS ONE YEAR AGO: PASS
The EPS for the quarter one year ago must be positive. LGIH's EPS for this quarter last year ($0.86) 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. LGIH's growth rate of 62.79% 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 LGIH is 31.73%. This should be less than the growth rates for the 3 previous quarters which are 38.89%, -8.77% and 43.75%. LGIH 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, 28.89%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 62.79%, (versus the same quarter one year ago) then the stock passes.
EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: FAIL
The EPS growth rate for the current quarter, 62.79% must be greater than or equal to the historical growth which is 63.45%. Since this is not the case LGIH would therefore fail this test.
EARNINGS PERSISTENCE: PASS
Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. LGIH, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.50, 1.07, 1.33, 2.44 and 3.41, 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. LGIH's long-term growth rate of 63.45%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.
TOTAL DEBT/EQUITY RATIO: FAIL
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. LGIH's Debt/Equity (103.90%) is considered high relative to its industry (51.71%) and fails 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 LGIH, this criterion has not been met (insider sell transactions are 75, while insiders buying number 40). 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. |
| Strategy: P/E/Growth Investor
Based on: Peter Lynch |
| Paycom Software, Inc. is a provider of a cloud-based human capital management (HCM) software solution delivered as Software-as-a-Service (SaaS). The Company provides functionality and data analytics that businesses need to manage the complete employment life cycle from recruitment to retirement. The Company's applications streamline client processes and provide clients and their employees with the ability to directly access and manage administrative processes, including applications that identify candidates, on-board employees, manage time and labor, administer payroll deductions and benefits, manage performance, terminate employees and administer post-termination health benefits, such as COBRA. The Company's solution allows clients to analyze employee information to make business decisions. The Company's HCM solution offers a range of applications, including talent acquisition, time and labor management, payroll, talent management and human resources (HR) management. |
DETERMINE THE CLASSIFICATION:
This methodology would consider PAYC a "fast-grower".
P/E/GROWTH RATIO: PASS
The investor should examine the P/E (76.64) relative to the growth rate (201.85%), based on the average of the 3 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for PAYC (0.38) is very favorable.
SALES AND P/E RATIO: NEUTRAL
For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. PAYC, whose sales are $406.8 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate.
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 PAYC was 0.49% last year, while for this year it is 0.21%. Since inventory to sales has decreased from last year by -0.28%, PAYC passes this test.
EPS GROWTH RATE: FAIL
This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for PAYC is 201.9%, based on the average of the 3 and 5 year historical eps growth rates, which is considered too fast.
TOTAL DEBT/EQUITY RATIO: PASS
This methodology would consider the Debt/Equity ratio for PAYC (21.86%) 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 PAYC (1.15%) 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 PAYC (0.56%) 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. |
| Strategy: Growth Investor
Based on: Martin Zweig |
| Cooper Tire & Rubber Company is a manufacturer and marketer of replacement tires. The Company specializes in the design, manufacture, marketing and sales of passenger car, light truck, medium truck, motorcycle, and racing tires. The Company operates through four segments: North America, Latin America, Europe, and Asia. The North America segment comprises its operations in the United States and Canada. The Americas Tire Operations segment manufactures and markets passenger car and light truck tires, for sale in the United States replacement markets. The Latin America segment comprises its operations in Mexico, Central America, and South America. The European segment has operations in the United Kingdom and the Republic of Serbia. Its the United Kingdom entity manufactures and markets passenger car, light truck, motorcycle and racing tires and tire retread material. As of December 31, 2016, the Company operated nine manufacturing facilities and 20 distribution centers in 10 countries. |
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. CTB's P/E is 8.71, based on trailing 12 month earnings, while the current market PE is 24.00. 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. CTB's revenue growth is -5.38%, while it's earnings growth rate is 15.38%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, CTB 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 (-2.3%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-2.6%) of the current year. Sales growth for the prior must be greater than the latter. For CTB 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. CTB's EPS ($1.18) pass this test.
QUARTERLY EARNINGS ONE YEAR AGO: PASS
The EPS for the quarter one year ago must be positive. CTB's EPS for this quarter last year ($0.90) 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. CTB's growth rate of 31.11% passes this test.
EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: FAIL
Compare the earnings growth rate of the past four quarters with long-term EPS growth rate. Earnings growth in the past 4 quarters should be at least half of the long-term EPS growth rate. A stock should not be considered if it posted several quarters of skimpy earnings. CTB had 2 quarters of skimpy growth in the last 2 years.
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, -19.64%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 31.11%, (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, 31.11% must be greater than or equal to the historical growth which is 15.38%. CTB 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. CTB, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 3.49, 1.73, 3.42, 3.69, and 4.51, 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. CTB's long-term growth rate of 15.38%, 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. CTB's Debt/Equity (28.43%) is not considered high relative to its industry (59.51%) 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 CTB, this criterion has not been met (insider sell transactions are 157, while insiders buying number 275). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion. |
MAGNA INTERNATIONAL INC. (USA) |
| Strategy: P/E/Growth Investor
Based on: Peter Lynch |
| Magna International Inc. (Magna) is a global automotive supplier. The Company's segments are North America, Europe, Asia, Rest of World, and Corporate and Other. The Company's product capabilities include producing body, chassis, exterior, seating, powertrain, electronic, active driver assistance, vision, closure, and roof systems and modules, as well as vehicle engineering and contract manufacturing. The Company has over 320 manufacturing operations and approximately 100 product development, engineering and sales centers in over 30 countries. It provides a range of body, chassis and engineering solutions to its original equipment manufacturer (OEM) customers. It has capabilities in powertrain design, development, testing and manufacturing. It offers bumper fascia systems, exterior trim and modular systems. It offers exterior and interior mirror systems. It offers sealing, trim, engineered glass and module systems. It offers softtops, retractable hardtops, modular tops and hardtops. |
DETERMINE THE CLASSIFICATION:
MGA is considered a "True Stalwart", according to this methodology, as its earnings growth of 11.09% lies within a moderate 10%-19% range and its annual sales of $37,808 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. MGA is attractive if MGA 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 MGA was 7.98% last year, while for this year it is 7.69%. Since inventory to sales has decreased from last year by -0.29%, MGA passes this test.
YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: PASS
The Yield-adjusted P/E/G ratio for MGA (0.72), 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. MGA's EPS ($5.61) would satisfy this criterion.
TOTAL DEBT/EQUITY RATIO: PASS
This methodology would consider the Debt/Equity ratio for MGA (33.95%) to be normal (equity is approximately twice debt).
FREE CASH FLOW: NEUTRAL
The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for MGA (5.70%) 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 MGA (-11.15%) 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. |
IPG PHOTONICS CORPORATION |
| Strategy: Small-Cap Growth Investor
Based on: Motley Fool |
| IPG Photonics Corporation is a developer and manufacturer of a line of fiber lasers, fiber amplifiers, diode lasers, laser systems and optical accessories that are used for various applications. The Company offers a line of lasers and amplifiers, which are used in materials processing, communications and medical applications. The Company sells its products globally to original equipment manufacturers (OEMs), system integrators and end users. The Company's manufacturing facilities are located in the United States, Germany and Russia. The Company offers laser-based systems for certain markets and applications. Its products are designed to be used as general-purpose energy or light sources. Its product line includes High-Power Ytterbium CW (1,000-100,000 Watts), Mid-Power Ytterbium CW (100-999 Watts), Pulsed Ytterbium (0.1 to 200 Watts), Pulsed and CW, Quasi-CW Ytterbium (100-4,500 Watts), Erbium Amplifiers and Transceivers. |
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. IPGP's profit margin of 27.84% 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. IPGP, with a relative strength of 96, satisfies this test.
COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: PASS
Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for IPGP (63.57% for EPS, and 47.59% for Sales) are good enough to pass.
INSIDER HOLDINGS: PASS
IPGP's insiders should own at least 10% (they own 33.35% ) 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. IPGP's free cash flow of $3.07 per share passes this test.
PROFIT MARGIN CONSISTENCY: FAIL
The profit margin in the past must be consistently increasing. The profit margin of IPGP has been inconsistent in the past three years (Current year: 25.92%, Last year: 26.87%, Two years ago: 26.04%), which is unacceptable. This inconsistency will carryover directly to the company's bottom line, or earnings per share.
R&D AS A PERCENTAGE OF SALES: PASS
IPGP is either maintaining the same levels of R&D expenditures(currently $78.6 million) or increasing these levels which is a good sign. This allows the company to develop the superior technology and new products that will put everyone else out of business. This criterion is particularly important for high-tech and medical stocks because they are so R&D dependant.
CASH AND CASH EQUIVALENTS: PASS
IPGP's level of cash $830.6 million passes this criteria. If a company is a cash generator, like IPGP, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.
INVENTORY TO SALES: PASS
This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for IPGP was 22.61% last year, while for this year it is 23.75%. Although the inventory to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive.
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 IPGP was 16.70% last year, while for this year it is 15.49%. Since the AR to sales is decreasing by -1.20% the stock passes this criterion.
LONG TERM DEBT/EQUITY RATIO: PASS
IPGP's trailing twelve-month Debt/Equity ratio (2.36%) is a little higher than what this methodology is looking for, but is still at an acceptable level. The superior companies that you are looking for don't need to borrow money in order to grow. This company has borrowed very little which is still OK.
"THE FOOL RATIO" (P/E TO GROWTH): FAIL
The "Fool Ratio" is an extremely important aspect of this analysis. The methodology says consider shorting shares when the company's Fool Ratio is greater than 1.30. IPGP's PEG Ratio of 2.19 is excessively high.
The following criteria for IPGP are less important which means you would place less emphasis on them when making your investment decision using this strategy:
AVERAGE SHARES OUTSTANDING: PASS
IPGP has not been significantly increasing the number of shares outstanding within recent years which is a good sign. IPGP currently has 55.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.
SALES: FAIL
Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. IPGP's sales of $1,328.0 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years.
DAILY DOLLAR VOLUME: FAIL
IPGP does not pass the Daily Dollar Volume (DDV of $85.6 million) test. It exceeds the maximum requirement of $25 million. Stocks that fail the test are too liquid for a small individual investor and many institutions have already discovered it.
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. IPGP with a price of $233.27 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
IPGP's income tax paid expressed as a percentage of pretax income this year was (28.88%) and last year (29.15%) 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. |
| Strategy: P/E/Growth Investor
Based on: Peter Lynch |
| Argan, Inc. is a holding company. The Company conducts operations through its subsidiaries, Gemma Power Systems, LLC and affiliates (GPS), Atlantic Projects Company Limited (APC), Southern Maryland Cable, Inc. (SMC) and The Roberts Company (Roberts). Through GPS and APC, the Company's power industry services segment provides engineering, procurement, construction, commissioning, operations management, maintenance, development, technical and consulting services to the power generation and renewable energy markets. Through SMC, the telecommunications infrastructure services segment of the Company provides project management, construction, installation and maintenance services to commercial, local government and federal government customers. Through Roberts, the Company's industrial fabrication and field services segment produces, delivers and installs fabricated steel components specializing in pressure vessels and heat exchangers for industrial plants. |
DETERMINE THE CLASSIFICATION:
This methodology would consider AGX a "fast-grower".
P/E/GROWTH RATIO: PASS
The investor should examine the P/E (10.61) relative to the growth rate (32.48%), 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 AGX (0.33) is very favorable.
SALES AND P/E RATIO: NEUTRAL
For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. AGX, whose sales are $872.5 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate.
INVENTORY TO SALES: PASS
When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for AGX was 0.99% last year, while for this year it is 0.47%. Since inventory to sales has decreased from last year by -0.51%, AGX passes this test.
EPS GROWTH RATE: PASS
This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for AGX is 32.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.
TOTAL DEBT/EQUITY RATIO: PASS
This methodology would consider the Debt/Equity ratio for AGX (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 AGX (26.63%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.
NET CASH POSITION: BONUS PASS
Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for AGX (56.45%) is considered very favorable. |
| Strategy: Growth/Value Investor
Based on: James P. O'Shaughnessy |
| Thor Industries, Inc. manufactures a range of recreational vehicles (RVs) in the United States and sells those vehicles primarily in the United States and Canada. The Company's segments include towable recreational vehicles, which consists of the operations of Airstream, Inc. (Airstream) (towable); Heartland Recreational Vehicles, LLC (Heartland) (including Bison Coach, LLC (Bison), Cruiser RV, LLC (CRV) and DRV, LLC (DRV)); Jayco, Corp. (Jayco) (including Jayco towable, Starcraft and Highland Ridge), Keystone RV Company (Keystone) (including CrossRoads and Dutchmen) and K.Z., Inc. (KZ) (including Livin' Lite RV, Inc. (Livin' Lite)); motorized recreational vehicles, which consists of the operations of Airstream (motorized), Jayco (including Jayco motorized and Entegra Coach) and Thor Motor Coach, Inc. (Thor Motor Coach), and Other, which includes the operations of its subsidiary, Postle Operating, LLC (Postle). |
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 $6,913 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 2.86, 3.29, 3.79, 4.91 and 7.09, 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 0.95, 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 85, is in the top 50 and would pass this last criterion. |
| Strategy: P/E/Growth Investor
Based on: Peter Lynch |
| Signet Jewelers Limited is a retailer of diamond jewelry. The Company's segments include the Sterling Jewelers division; the Zale division, which consists of the Zale Jewelry and Piercing Pagoda segments; the UK Jewelry division, and Other. The Sterling Jewelers division's stores operate in the United States principally as Kay Jewelers (Kay), Kay Jewelers Outlet, Jared The Galleria Of Jewelry (Jared) and Jared Vault. The Zale division operates jewelry stores (Zale Jewelry) and kiosks (Piercing Pagoda), located primarily in shopping malls across the United States, Canada and Puerto Rico. Zale Jewelry includes the United States store brand, Zales, and the Canadian store brand, Peoples Jewellers. Piercing Pagoda operates through mall-based kiosks. The UK Jewelry division operates stores in the United Kingdom, Republic of Ireland and Channel Islands. The Other segment includes the operations of subsidiaries involved in the purchasing and conversion of rough diamonds to polished stones. |
DETERMINE THE CLASSIFICATION:
SIG is considered a "True Stalwart", according to this methodology, as its earnings growth of 13.45% lies within a moderate 10%-19% range and its annual sales of $6,259 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. SIG is attractive if SIG can hold its own during a recession.
YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: PASS
The Yield-adjusted P/E/G ratio for SIG (0.80), 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. SIG's EPS ($6.16) would satisfy this criterion.
TOTAL DEBT/EQUITY RATIO: PASS
This methodology would consider the Debt/Equity ratio for SIG (58.96%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for SIG 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 SIG (5.70%) 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 SIG (-11.68%) 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. |
| Strategy: Growth Investor
Based on: Martin Zweig |
| Sanderson Farms, Inc. is a poultry processing company. The Company is engaged in the production, processing, marketing and distribution of fresh and frozen chicken, and also preparation, processing, marketing and distribution of processed and minimally prepared chicken. It sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, under the Sanderson Farms brand name to retailers, distributors, casual dining operators, customers reselling frozen chicken into export markets. The Company, through its subsidiaries, Sanderson Farms, Inc. (Production Division) and Sanderson Farms, Inc. (Processing Division), conducts its chicken operations. Sanderson Farms, Inc. (Production Division) is engaged in the production of chickens to the broiler-stage. Sanderson Farms, Inc. (Foods Division) is engaged in the processing, sale and distribution of chickens. The Company, through Sanderson Farms, Inc. (Foods Division), conducts its prepared chicken business. |
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. SAFM's P/E is 13.26, based on trailing 12 month earnings, while the current market PE is 24.00. 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. SAFM's revenue growth is 2.92%, while it's earnings growth rate is 25.52%, based on the average of the 3 and 4 year historical eps growth rates. Therefore, SAFM 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 (28%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (15.9%) of the current year. Sales growth for the prior must be greater than the latter. For SAFM 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. SAFM's EPS ($5.09) pass this test.
QUARTERLY EARNINGS ONE YEAR AGO: PASS
The EPS for the quarter one year ago must be positive. SAFM's EPS for this quarter last year ($2.42) 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. SAFM's growth rate of 110.33% 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 SAFM is 12.76%. This should be less than the growth rates for the 3 previous quarters, which are 173.17%, 117.02%, and 41.23%. SAFM 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, 93.18%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 110.33%, (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, 110.33% must be greater than or equal to the historical growth which is 25.52%. SAFM 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. SAFM, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.35, 5.68, 10.80, 9.52, and 8.37, 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. SAFM's long-term growth rate of 25.52%, based on the average of the 3 and 4 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. SAFM's Debt/Equity (0.00%) is not considered high relative to its industry (159.45%) 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 SAFM, this criterion has not been met (insider sell transactions are 1,149, while insiders buying number 323). 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 |
Industry |
Current
Score |
| CUTR |
CUTERA, INC. |
Medical Equipment & Supplies |
62% |
| JP |
JUPAI HOLDINGS LTD (ADR) |
Investment Services |
61% |
| UTHR |
UNITED THERAPEUTICS CORPORATION |
Biotechnology & Drugs |
59% |
| AEIS |
ADVANCED ENERGY INDUSTRIES, INC. |
Electronic Instr. & Controls |
58% |
| MAN |
MANPOWERGROUP INC. |
Business Services |
58% |
| UFPI |
UNIVERSAL FOREST PRODUCTS, INC. |
Forestry & Wood Products |
57% |
| SUPV |
GRUPO SUPERVIELLE SA -ADR |
Regional Banks |
56% |
| MU |
MICRON TECHNOLOGY, INC. |
Semiconductors |
53% |
| FB |
FACEBOOK INC |
Computer Services |
52% |
| HIBB |
HIBBETT SPORTS, INC. |
Retail (Specialty) |
50% |
|
