Economy & Markets

The markets are trying to get used to the idea of slower growth. Stocks zigzagged in recent trading as the reality starts to set in. As traders fret over disappointing economic data and whether it would spill over to consumer behavior, however, sharp drops in stocks led to buying opportunities. The possibility of future interest rate cuts has also put some support under stocks. While the market seems to be accepting a slower growth environment in the near term, the expectation is a little rosier than outright recession. There will be growth in 2020, just not a lot. And any positive developments on trade could create more upside potential. Six of the S&P 500 sectors are leading the index, which is up 19.5% this year. The outperformers are led by technology, followed by real estate and consumer discretionary. Energy is the worst-performing sector this year, up just 1.2%. Healthcare is up just 5.7%. The S&P 500 is trading at a trailing P/E of 22.8, while the Dow Jones Industrial Average is trading at 19.4.

Some numbers to keep in mind :

1. Housing starts in the US fell from a 12-year high in September. Single family home construction rose for the fourth month in a row.

2. U.S. retail sales in September fell for the first time in seven months, raising concern that manufacturing weakness was spreading to the broader economy.

3. St. Louis Fed President James Bullard said global trade and other risks were still high, and the U.S. economy could slow more sharply than expected.

4. Consumer prices were unchanged in September, the weakest reading since January as rising costs of food and rent offset declines in energy and vehicle prices, the Labor Department said.

5. U.S. producer prices also fell unexpectedly last month, as the cost of goods and services declined.

6. September unemployment fell to 3.5%, a five-decade low, as payrolls rose 136,000.

Recommended Reading

Larry Swedroe recently wrote in Advisor Perspectives how regular investors have not benefited from the wealth created by private equity. He pointed to a recent study that showed how private equity had not outperformed mutual funds on a risk-adjusted basis, plus the liquidity constraints on private equity investors. Meanwhile, private equity may be headed for a change, according to Institutional Investor, citing a study by Willis Towers Watson's investment think tank. The traditional model of using leverage to make operational improvements and then selling a company in a short amount of time has reached the end of its useful life, the study says. For more on these articles, read here and here , and see below for links to more articles and blog posts you may have missed.

Active Mistakes: Active managers are making fundamental strategy mistakes in the emerging markets, according to a report by Willis Towers Watson, which found they were missing their benchmarks despite focusing on small-cap stocks and emerging markets. Read more

Higher Ed Woes: University endowments are stumbling, notes Barry Ritholtz. Return estimates of 8.7% are too optimistic considering the reality: Harvard's return was 6.5% for the fiscal year ended in June, Yale's was 5.7%, Penn, 6.5%, and Dartmouth 7.5%. Read more

Foregone Conclusion: Words can set off a recession, according to Yale's Robert Shiller in a recent New York Times article. Investors react with emotion to certain economic indicators and that affects their decision making, increasing their contagion affect. Read more

Value Rebound: QMA CEO Andrew Dyson says value stocks are poised to generate their best returns in a quarter-century. The quant spoke to Barron's about what he sees as a mispricing in the market for value stocks. Read more

Finding Value: Miller Value Partners' manager Samantha McLemore said it's premature to call the end of the bull market and says stocks still look better than the alternatives. She continues to focus on free cash flow when evaluating businesses. Read more

Passive Hype: It's just hype that passive management is taking over active, according to Barry Ritholtz, who points out that active strategies have an 8-to-1 lead over passive in terms of investment. Mutual funds and exchange traded funds are just one part of the investing universe. Read more

Greenlight Surge: The shift from momentum in September boosted David Einhorn's Greenlight Capital, which was up 8% for the month and 24% for the year, according to Bloomberg. That puts Einhorn back on track after his worst year as he continues to buy beaten down stocks and bet against growth companies. Read more

Rate Damage: Ken Fisher recently wrote in a USA Today column that the Federal Reserve's interest rate cuts will hurt the economy. Instead, the central bank should focus on whittling down its portfolio of bond holdings and let loan and money growth accelerate. Read more

Equity Boost: Bill Gates recently told Bloomberg Television how he has managed to add $16 billion to his net worth this year by being over 60% invested in equities. On the Bloomberg billionaire index, he ranks just behind Amazon's Jeff Bezos even as his charitable donations topped $35 billion. Read more

Sector Play: Energy stocks should be having their day in the sun, according to research by JP Morgan. It has been the second-worst performing sector so far this year, lagging the index by nearly 13 percentage points. Read more

Investor Fear: Peter Lynch tells Fidelity.com that the most important organ for an investor is the stomach, not the brain. Tolerance for pain is the most important attribute, because there will always be market drops. Read more

Value Turn: O'Shaughnessy Asset Management's Chris Meredith recently appeared on Bloomberg's Markets Odd Lots podcast and talked about the outlook for value investing after a prolonged period of underperformance. In past periods of technological development, value stocks turned around when the technology was adopted by traditional companies. Read more

Timing Factor: Managers can generate better returns by using market timing factors than passive strategies, but the costs associated with that often outweigh the benefits, according to Institutional Investor, citing a study by Analysts Journal. Read more

Favorable Odds: The rotation from growth to value last month provided vindication for Research Affiliates' Rob Arnott. He told Bloomberg the odds are in value's favor going forward, though obviously it's not possible to predict exactly what will happen next. Read more

Mispricing Risk: Morningstar recently explored the unintended consequences of the investing public's rush to index investing. As more people index, fewer are doing fundamental analysis. That could cause mispricing. Read more

Abolish Billionaires: Governments should address economic inequality by upending capitalism, says French economist Thomas Piketty, according to Bloomberg. His latest 1,200 page work is a look at how to abolish billionaires. Read more

Buffett Cub: Warren Buffett protege Tracy Britt Cool recently left Berkshire Hathaway to start her own firm, WSJ reports. She specializes in helping struggling companies, including Benjamin Moore, Oriental Trading and other Berkshire portfolio holdings. Read more


The Fallen

As we rebalance the Validea Hot List, 2 stocks leave our portfolio. These include: Magna International Inc. (Usa) (MGA) and Credit Acceptance Corp. (CACC).

The Keepers

8 stocks remain in the portfolio. They are: D. R. Horton Inc (DHI), Copart, Inc. (CPRT), Skechers Usa Inc (SKX), Mastercard Inc (MA), Monster Beverage Corp (MNST), Nk Lukoil Pao (Adr) (LUKOY), Onemain Holdings Inc (OMF) and Pennymac Financial Services Inc (PFSI).

The New Additions

We are adding 2 stocks to the portfolio. These include: Criteo Sa (Adr) (CRTO) and Medpace Holdings Inc (MEDP).

Latest Changes

Additions  
CRITEO SA (ADR) CRTO
MEDPACE HOLDINGS INC MEDP
Deletions  
MAGNA INTERNATIONAL INC. (USA) MGA
CREDIT ACCEPTANCE CORP. CACC

The Rising Bar for Active Management

It's not that active management is dead, it's just getting a lot harder to beat the market, as Validea's Jack Forehand explains. Active managers used to be measured by their ability to beat the S&P 500, and they could rely on factor strategies to do this. But the proliferation of low-cost exchange traded funds focused on these same factors has raised the competitive bar for active managers. Now, they have to beat the ETFs, too. "The low hanging fruit of beating the market by just buying stocks using any given factor and weighting your portfolio by something other than market cap is now no longer available," Forehand writes. Read more of his analysis here:

Active managers as a whole have always been pretty bad at their job. Depending on what data source you use and what time frame you look at, somewhere north of 80% of active equity managers underperform their benchmarks after fees over long periods of time. When building Validea, we've tried to key in on those individuals and strategies that have a long term record of success, but the number of those methods is few and far between. Finance theory tells us that active managers as a whole can't beat the market because in aggregate their gross returns have to match the market's returns and their net returns will fall below the market's return by the amount of fees they charge. But that still leaves room for some managers to buck that trend and produce outperformance over the long-term as long as others are matching that with underperformance on the other side.

So how have the manager's that have beaten the S&P 500 over the long-term been able do it? The answer to that question not only helps us better understand the past, but it also helps us recognize why producing alpha is likely to be much harder in the future. To appreciate why this is, you first need to take a look at the bar that asset managers are trying to exceed, and how it has changed over time.

For as long as I can remember, most active managers have been judged against the S&P 500, which is a large-cap index that is weighted based on market capitalization. This isn't a fair comparison in many cases because a significant portion of active managers include small and mid-cap stocks in their portfolios, but it is nonetheless the reality that managers face.

Being compared to the S&P 500 opens up a variety of opportunities for active managers to produce excess returns. Firstly, research has shown that weighting your portfolio based on pretty much anything but market cap will lead to outperformance over a market cap weighted index over time. On top of that, using factors like value and momentum will add on additional excess return above the benchmark.

If I was an active manager twenty years ago, I could buy cheap stocks and weight my portfolio equally and I was likely to produce a long-term return that exceeded the market as a whole. Research has shown that when you break down the portfolios of many of the star managers of the past using factors, this is exactly what they did. But the rise of factor investing has changed all of that.

Now that factors are more understood and products using them are more commercially available, the bar that active managers must cross has also risen. Investors can now get exposure to factors like value and momentum for expense ratios that are less than .15%. As an active manager, you now not only need to beat the S&P 500, you also need to beat the factor you are following itself. The low hanging fruit of beating the market by just buying stocks using any given factor and weighting your portfolio by something other than market cap is now no longer available. The challenge of beating the market, which the data shows was very difficult to start with, has now gotten much harder.

Let's look at an example. Assume you are an active manager and below is the chart of your performance against the S&P 500 since 2013 (your fund is the darker blue line).

Pretty impressive, right? You must have a great stock picking system to beat your benchmark by that much. That type of performance, if it continued over time, would certainly justify fees that are well above an S&P 500 index fund. If you were an active manager in 2003, this type of performance would likely lead you to grow your fund significantly and be looked at as a great stock picker. It could have made your career.

So who is this highly skilled active manager who soundly beat his or her benchmark? It isn't an active manager at all. It is the iShares Edge MSCI U.S.A. Momentum Factor ETF, which currently charges a fee of 0.15%. If I am an active manager who invests in momentum stocks, the S&P 500 is no longer the bar I need to exceed - this type of ETF is.

Value has obviously struggled in recent years, but the same concept applies to it and all the other factors. A simple, diversified implementation of all the major factors is now available for a very low fee from a variety of ETF providers. If you are a manager who uses those factors, regardless of whether you do it directly or indirectly, those ETFs are now the bar you should be judged against. That is a significantly more difficult long-term challenge than just beating the S&P 500. And most active managers weren't even up for that task.

None of this is meant to say that active management is impossible. If history is any guide, there are certainly ways to beat a diversified exposure to a factor like value. For example, if you are willing to live with the tracking error that comes with it, focused portfolios built using factors tend to beat more diversified ones over time. These types of portfolios are also much less likely to be offered by the large providers who charge the lowest fees because they don't scale. That offers an opportunity for patient managers who can stomach short-term volatility and underperformance in the pursuit of long-term excess returns. But the days of justifying high fees by building portfolios with simple factor exposures are over. Trying to beat the market has always been a very difficult game. With the rise of factor funds, it has become much harder.

Newcomers to the Hot List

Criteo SA (CRTO) (ADR) - This French specialist in digital performance marketing scores well on the models tracking the styles of Peter Lynch, Tobias Carlisle and Kenneth Fisher.

Medpace Holdings Inc. (MEDP) - This clinical contract research firm scores well on Validea's small-cap growth and momentum investing models.

News on Hot List Stocks

Copart Inc, a digital vehicle auction company, is expanding its Montreal location in Canada by 24 acres.

Criteo announced a partnership with Pixalate, a cross-platform ad fraud detection and prevention service.

Cowen downgraded Monster Beverage shares because of increasing competition in the energy drink market.


Portfolio Holdings
Ticker Date Added Return
CRTO 10/18/2019 TBD
LUKOY 4/5/2019 -0.6%
CPRT 9/20/2019 -1.9%
PFSI 8/23/2019 13.8%
MEDP 10/18/2019 TBD
OMF 8/23/2019 -4.5%
MNST 9/20/2019 -3.1%
DHI 8/23/2019 8.7%
SKX 8/23/2019 27.2%
MA 6/28/2019 4.5%


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

CRTO  |   LUKOY  |   CPRT  |   PFSI  |   MEDP  |   OMF  |   MNST  |   DHI  |   SKX  |   MA  |  

CRITEO SA (ADR)

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

Criteo SA is a France-based company specializing in digital performance marketing. Its solution consists of the Criteo Engine, the Company's data assets, access to inventory, and its advertiser and publisher platforms. The Criteo Engine consists of various machine learning algorithms, such as prediction, recommendation, bidding and creative algorithms and the global hardware and software infrastructure. The Criteo Engine delivers advertisements through multiple marketing channels and formats, including display advertising banners, native advertising banners and marketing messages delivered to opt-in e-mail addresses. Advertisements are delivered on all devices and screens, including Web browsers on desktops and laptops, mobile Web browsers on smart phones and tablets, as well as mobile applications. It operates in approximately 90 countries through a network of over 30 international offices located in Europe, the Americas and the Asia-Pacific region.


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. CRTO's P/S of 0.54 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. CRTO's Debt/Equity of 0.41% 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. CRTO 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 CRTO At this Point

Is CRTO a "Super Stock"? NO


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.CRTO's P/S ratio of 0.54 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%. CRTO's inflation adjusted EPS growth rate of 44.79% 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. CRTO's free cash per share of 2.00 passes this criterion.


THREE YEAR AVERAGE NET PROFIT MARGIN: FAIL

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. CRTO, whose three year net profit margin averages 4.13%, fails this evaluation.

NK LUKOIL PAO (ADR)

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

NK Lukoil PAO is an energy company. The primary activities of LUKOIL and its subsidiaries are oil exploration, production, refining, marketing and distribution. Its segments include Exploration and Production; Refining, Marketing and Distribution, and Corporate and other. The Exploration and Production segment includes its exploration, development and production operations related to crude oil and gas. These activities are located within Russia, with additional activities in Azerbaijan, Kazakhstan, Uzbekistan, the Middle East, Northern and Western Africa, Norway, Romania and Mexico. The Refining, Marketing and Distribution segment includes refining, petrochemical and transport operations, marketing and trading of crude oil, natural gas and refined products, generation, transportation and sales of electricity, heat and related services. The Corporate and other segment includes operations related to finance activities, production of diamonds and certain other activities.


DETERMINE THE CLASSIFICATION:

LUKOY is considered a "True Stalwart", according to this methodology, as its earnings growth of 15.36% lies within a moderate 10%-19% range and its annual sales of $129,869 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. LUKOY is attractive if LUKOY 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 LUKOY was 6.71% last year, while for this year it is 4.75%. Since inventory to sales has decreased from last year by -1.96%, LUKOY passes this test.


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

The Yield-adjusted P/E/G ratio for LUKOY (0.30), based on the average of the 3, 4 and 5 year historical eps growth rates, is excellent.


EARNINGS PER SHARE: PASS

The EPS for a stalwart company must be positive. LUKOY's EPS ($14.92) would satisfy this criterion.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for LUKOY (16.04%) 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 LUKOY (9.72%) 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 LUKOY (-12.98%) 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.

COPART, INC.

Strategy: Growth Investor
Based on: Martin Zweig

Copart, Inc. (Copart) is a provider of online auctions and vehicle remarketing services in the United States, Canada, the United Kingdom, the United Arab Emirates, Oman, Bahrain, Brazil, Ireland, Spain and India. The Company also provides vehicle remarketing services in Germany. The Company operates through two segments: United States and International. The Company provides vehicle sellers with a range of services to process and sell vehicles primarily over the Internet through its virtual bidding third generation Internet auction-style sales technology (VB3). The Company's service offerings include Online Seller Access, Salvage Estimation Services, Estimating Services, End-Of-Life Vehicle Processing, Virtual Insured Exchange (VIX), Transportation Services, Vehicle Inspection Stations, On-Demand Reporting, Department of Motor Vehicle (DMV) Processing, Flexible Vehicle Processing Programs, Buy It Now, Member Network, Sales Process, Copart Dealer Services, CashForCars.com and U-Pull-It.


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. CPRT's P/E is 32.79, based on trailing 12 month earnings, while the current market PE is 18.00. 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. CPRT's revenue growth is 14.82%, while it's earnings growth rate is 30.06%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, CPRT 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 (20.8%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (15.7%) of the current year. Sales growth for the prior must be greater than the latter. For CPRT 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. CPRT's EPS ($0.64) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. CPRT's EPS for this quarter last year ($0.44) 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. CPRT's growth rate of 45.45% 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 CPRT is 15.03%. This should be less than the growth rates for the 3 previous quarters, which are 46.88%, 17.02%, and 52.83%. CPRT 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, 38.64%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 45.45%, (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, 45.45% must be greater than or equal to the historical growth which is 30.06%. CPRT 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. CPRT, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.84, 1.11, 1.66, 1.76 and 2.46, 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. CPRT's long-term growth rate of 30.06%, 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. CPRT's Debt/Equity (22.56%) is not considered high relative to its industry (67.17%) 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 CPRT, this criterion has not been met (insider sell transactions are 6, while insiders buying number 8). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.

PENNYMAC FINANCIAL SERVICES INC

Strategy: Growth Investor
Based on: Martin Zweig

PennyMac Financial Services, Inc. is a specialty financial services firm. The Company conducts business in three segments: production, servicing (together, production and servicing comprise its mortgage banking activities) and investment management. Production segment performs mortgage loan origination, acquisition and sale activities. Servicing segment performs mortgage loan servicing for its own account and for others, including for PennyMac Mortgage Investment Trust (PMT). Investment management segment represents its investment management activities, which include the activities associated with investment asset acquisitions and dispositions, such as sourcing, due diligence, negotiation and settlement; managing correspondent production activities for PMT; and managing the acquired investments for PMT. Its primary subsidiaries are: PNMAC Capital Management, LLC, PennyMac Loan Services, LLC and PNMAC Opportunity Fund Associates, LLC.


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. PFSI's P/E is 11.98, based on trailing 12 month earnings, while the current market PE is 18.00. 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. PFSI's revenue growth is 20.69%, while it's earnings growth rate is 46.19%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, PFSI 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 (59.5%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (28%) of the current year. Sales growth for the prior must be greater than the latter. For PFSI 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. PFSI's EPS ($0.92) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. PFSI's EPS for this quarter last year ($0.70) 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. PFSI's growth rate of 31.43% 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. PFSI had 3 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, -48.55%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 31.43%, (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, 31.43% must be greater than or equal to the historical growth which is 46.19%. Since this is not the case PFSI would therefore fail this test.


EARNINGS PERSISTENCE: FAIL

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. PFSI, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.48, 0.62, 0.86, 3.48, and 2.59, 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. PFSI's long-term growth rate of 46.19%, based on the average of the 3, 4 and 5 year historical eps growth rates, 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 PFSI, this criterion has not been met (insider sell transactions are 18, while insiders buying number 5). 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.

MEDPACE HOLDINGS INC

Strategy: Growth Investor
Based on: Martin Zweig

Medpace Holdings, Inc. is a clinical contract research organization. The Company provides clinical research-based drug and medical device development services. The Company partners with pharmaceutical, biotechnology, and medical device companies in the development and execution of clinical trials. The Company's drug development services focus on full service Phase I-IV clinical development services and include development plan design, coordinated central laboratory, project management, regulatory affairs, clinical monitoring, data management and analysis, pharmacovigilance new drug application submissions, and post-marketing clinical support. The Company also provides bio-analytical laboratory services, clinical human pharmacology, imaging services, and electrocardiography reading support for clinical trials. The Company's operations are principally based in North America, Europe, and Asia.


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. MEDP's P/E is 32.90, based on trailing 12 month earnings, while the current market PE is 18.00. 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. MEDP's revenue growth is 25.09%, while it's earnings growth rate is 68.02%, based on the average of the 2 and 5 year historical and the current year eps growth rates. Therefore, MEDP 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 (25.8%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (23.1%) of the current year. Sales growth for the prior must be greater than the latter. For MEDP 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. MEDP's EPS ($0.73) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. MEDP's EPS for this quarter last year ($0.45) 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. MEDP's growth rate of 62.22% 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 MEDP is 34.01%. This should be less than the growth rates for the 3 previous quarters which are 108.00%, 177.27% and 27.50%. MEDP 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, 88.51%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 62.22%, (versus the same quarter one year ago) then the stock fails, with one exception: if the growth rate in earnings between the current quarter and the same quarter one year ago is greater than 30%, then the stock would pass. The growth rate over this period for MEDP is 62.2%, and it would therefore pass this test.


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

The EPS growth rate for the current quarter, 62.22% must be greater than or equal to the historical growth which is 68.02%. Since this is not the case MEDP 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. MEDP, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were -0.39, -0.22, 0.37, 0.91 and 1.97, 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. MEDP's long-term growth rate of 68.02%, based on the average of the 2 and 5 year historical and the current year 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. MEDP's Debt/Equity (0.00%) is not considered high relative to its industry (159.06%) 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. For MEDP, this criterion has been met, indicating an insider buy signal.

ONEMAIN HOLDINGS INC

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

OneMain Holdings, Inc. is a financial services holding company. The Company is a consumer finance company, which is engaged in providing personal loan products; credit and non-credit insurance, and service loans owned by it and service or subservice loans owned by third-parties. The Company's segments include Consumer and Insurance; Acquisitions and Servicing; Real Estate, and Other. It is engaged in pursuing strategic acquisitions and dispositions of assets and businesses, including loan portfolios or other financial assets. The Company originates and services personal loans (secured and unsecured) through two business divisions: branch operations and centralized operations. As of December 31, 2016, its combined branch operations included over 1,800 branch offices in 44 states. It offers optional credit insurance products to its customers, including credit life insurance, credit disability insurance, credit involuntary unemployment insurance and collateral protection insurance.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (7.49) relative to the growth rate (31.71%), based on the average of the 3 and 5 year historical eps growth rates using the current fiscal year eps estimate, 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 OMF (0.24) is very favorable.


SALES AND P/E RATIO: PASS

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. OMF, whose sales are $4,481.0 million, needs to have a P/E below 40 to pass this criterion. OMF's P/E of (7.49) is considered acceptable.


EPS GROWTH RATE: PASS

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for OMF is 31.7%, based on the average of the 3 and 5 year historical eps growth rates using the current fiscal year eps estimate, which is acceptable.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

OMF is a financial company so debt to equity rules are not applied to determine the company's financial soundness.


EQUITY/ASSETS RATIO: PASS

This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. OMF's Equity/Assets ratio (20.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion.


RETURN ON ASSETS: PASS

This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. OMF's ROA (3.26%) is above the minimum 1% that this methodology looks for, thus passing the criterion.


FREE CASH FLOW: BONUS PASS

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it 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 OMF (41.31%) is high enough to add to the attractiveness of the stock.


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 OMF (-300.34%) 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.

MONSTER BEVERAGE CORP

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

Monster Beverage Corporation develops, markets, sells and distributes energy drink beverages, sodas and/or concentrates for energy drink beverages, primarily under various brand names, including Monster Energy, Monster Rehab, Monster Energy Extra Strength Nitrous Technology, Java Monster, Muscle Monster, Mega Monster Energy, Punch Monster, Juice Monster, Ubermonster, BU, Mutant Super Soda, Nalu, NOS, Burn, Mother, Ultra, Play and Power Play, Gladiator, Relentless, Samurai, BPM and Full Throttle. The Company has three segments: Monster Energy Drinks segment, which consists of its Monster Energy drinks, as well as Mutant Super Soda drinks; Strategic Brands segment, which includes various energy drink brands owned through The Coca-Cola Company (TCCC), and Other segment (Other), which includes the American Fruits & Flavors (AFF) third-party products. The Strategic Brands segment sells concentrates and/or beverage bases to authorized bottling and canning operations.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (29.44) relative to the growth rate (20.74%), 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 MNST (1.42) is on the high side, but is acceptable if all the other tests are met.


SALES AND P/E RATIO: PASS

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. MNST, whose sales are $3,990.4 million, needs to have a P/E below 40 to pass this criterion. MNST's P/E of (29.44) is considered acceptable.


INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for MNST was 7.59% last year, while for this year it is 7.29%. Since inventory to sales has decreased from last year by -0.30%, MNST 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 MNST is 20.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for MNST (0.03%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for MNST (3.45%) 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 MNST (3.09%) 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.

D. R. HORTON INC

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

D.R. Horton, Inc. is a homebuilding company. The Company has operations in 84 markets in 29 states across the United States. The Company's segments include its 44 homebuilding divisions, its financial services operations and its other business activities. In the homebuilding segment, the Company builds and sells single-family detached homes and attached homes, such as town homes, duplexes, triplexes and condominiums. The Company's 44 homebuilding divisions are aggregated into six segments: East Region, South Central Region, Midwest Region, West Region, Southwest Region and Southeast Region. In the financial services segment, the Company sells mortgages and collects fees for title insurance agency and closing services. The Company has subsidiaries that conduct insurance-related operations; construct and own income-producing rental properties; own non-residential real estate, including ranch land and improvements, and own and operate oil and gas-related assets.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (12.85) relative to the growth rate (27.24%), 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 DHI (0.47) is very favorable.


SALES AND P/E RATIO: PASS

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. DHI, whose sales are $17,059.1 million, needs to have a P/E below 40 to pass this criterion. DHI's P/E of (12.85) is considered acceptable.


INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for DHI was 65.55% last year, while for this year it is 64.69%. Since inventory to sales has decreased from last year by -0.86%, DHI 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 DHI is 27.2%, 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 DHI (35.79%) 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 DHI (1.07%) 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 DHI (-5.86%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.

SKECHERS USA INC

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

Skechers U.S.A., Inc. is a designer and marketer of Skechers-branded lifestyle footwear for men, women and children, and performance footwear for men and women under the Skechers Performance brand name. It also offers apparel, accessories, eyewear, scrubs and other merchandise. It sells its footwear in department, specialty and independent stores, as well as through its Skechers retail stores and online at skechers.com. The Company operates through three segments: domestic wholesale sales, international wholesale sales, and retail sales, which includes e-commerce sales. Its lifestyle brands include Skechers USA, Skechers Sport, and Skechers Active and Skechers Sport Active. Its Performance Brands include Skechers Performance, Skechers Kids and Skechers Work. As of December 31, 2017, the Company's products are available in over 170 countries and territories through its network of subsidiaries in Asia, Europe, Canada, Central America and South America.


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. SKX's P/S ratio of 1.22 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. SKX's Debt/Equity of 5.34% 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. SKX 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 SKX At this Point

Is SKX 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, SKX, who has a P/S of 1.22, 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%. SKX's inflation adjusted EPS growth rate of 19.45% 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. SKX's free cash per share of 2.72 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. SKX, whose three year net profit margin averages 5.87%, passes this evaluation.

MASTERCARD INC

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

MasterCard Incorporated is a technology company that connects consumers, financial institutions, merchants, governments and businesses across the world, enabling them to use electronic forms of payment. The Company operates through Payment Solutions segment. The Company allows user to make payments by creating a range of payment solutions and services using its brands, which include MasterCard, Maestro and Cirrus. The Company provides a range of products and solutions that support payment products, which customers can offer to their cardholders. The Company's services facilitate transactions on its network among cardholders, merchants, financial institutions and governments. The Company's products include consumer credit and charge, commercial, debit, prepaid, commercial and digital. The Company's consumer credit and charge offers a range of programs that enables issuers to provide consumers with cards allowing users to defer payment.


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. MA's profit margin of 42.23% passes this test.


RELATIVE STRENGTH: FAIL

The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. Although MA's relative strength of 87 is below the acceptable level, yet it is very close. Keep an eye on the stock as it could move into the acceptable range.


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

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for MA (33.33% for EPS, and 12.22% for Sales) are not good enough to pass.


INSIDER HOLDINGS: PASS

MA's insiders should own at least 10% (they own 11.17% ) 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. MA's free cash flow of $4.46 per share passes this test.


PROFIT MARGIN CONSISTENCY: FAIL

The profit margin in the past must be consistently increasing. The profit margin of MA has been inconsistent in the past three years (Current year: 39.19%, Last year: 31.33%, Two years ago: 37.67%), which is unacceptable. This inconsistency will carryover directly to the company's bottom line, or earnings per share.


R&D AS A PERCENTAGE OF SALES: NEUTRAL

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


CASH AND CASH EQUIVALENTS: PASS

MA's level of cash $8,378.0 million passes this criteria. If a company is a cash generator, like MA, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.


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 MA was 26.76% last year, while for this year it is 31.63%. Although the AR to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive.


"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. MA's PEG Ratio of 2.58 is excessively high.

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

AVERAGE SHARES OUTSTANDING: PASS

MA has not been significantly increasing the number of shares outstanding within recent years which is a good sign. MA currently has 1,025.0 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. MA's sales of $15,707.0 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

MA does not pass the Daily Dollar Volume (DDV of $978.2 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. MA with a price of $276.51 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: FAIL

MA's income tax paid expressed as a percentage of pretax income either this year (19.71%) or last year (26.59%) is below 20% which is cause for concern. Because the tax rate is below 20% this could mean that the earnings that were reported are unrealistically inflated due to the lower level of income tax paid. However, we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%).


Watch List

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

Ticker Company Name Current
Score
MGA MAGNA INTERNATIONAL INC. (USA) 90%
EME EMCOR GROUP INC 78%
GPS GAP INC 75%
MBT MOBIL'NYE TELESISTEMY PAO (ADR) 74%
SLP SIMULATIONS PLUS, INC. 73%
ACN ACCENTURE PLC 73%
LPLA LPL FINANCIAL HOLDINGS INC 72%
ESNT ESSENT GROUP LTD 70%
AMTD TD AMERITRADE HOLDING CORP. 67%
URI UNITED RENTALS, INC. 67%



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