Economy & Markets

While the S&P 500 is up a solid 11% this year, new data could indicate some warning signs. Federal Reserve officials focused in their most recent meeting on how their efforts to cut the central bank's balance sheet are affecting risk assets like stocks and bonds. The latest meeting minutes reveal they may end the reduction program this year, earlier than expected. That's a good sign for investors. But other signs show softening in demand for U.S.-made goods and weakening consumer sentiment. The Conference Board's leading economic index fell for the second straight month in January, the first month-to-month pullback in three years. Stocks could be taking a pause after their rally this year, as concerns fade away about whether the U.S. and China would be able to come to an agreement on trade The S&P 500 is trading at a current multiple of 20, led by industrials, energy and information technology. Utilities, health care and consumer staples lag this year. The Dow Jones Industrial Average trades at a multiple of 18.

Some numbers to watch :

1. The Commerce Department said core U.S. durable capital goods orders fell in December, the fourth decline since August.

2. IHS Markit said the U.S. manufacturing purchasing managers' index fell to 53.7 in February, a 17-month low. Survey respondents cited a soft patch in demand.

3. New numbers suggest the labor market is slowing. While jobless claims fell last week, the four-week moving average is at a one-year high, Reuters reports.

4. U.S. existing home sales dropped 1.2% in January, the third consecutive month of declining sales.

5. TransUnion reports that unsecured personal loans hit an all-time high last year of $138 billion, and fintech startups are leading the way.

Recommended Reading

Indexing is popular, but the major indices like the S&P 500 are market-cap weighted and that can have some downsides, Morningstar notes. In certain markets or strategies it can compromise diversification and intended factor exposure because it emphasizes stocks that have the richest valuations. In some markets, these stocks become so large that they skew the overall index. And it underweights smaller, higher quality stocks with potentially better returns. The article suggests value investors use strategies that weight stocks differently. For more on this read here , and see links below for articles and blog posts you might have missed.

Value Rebound: Value bested growth by more than 2 percentage points in the fourth quarter, according to Financial Times. Weaker earnings growth for the tech sector and broader fragility in markets may be changing the game for stock pickers, says Brent Fredberg, the director of investments at Brandes Investment Partners. Read more

Bearish Shift: Quant investing shop AlphaSimplex Group did some research that found trend-following strategies have shifted to bearish from bullish to a degree not seen in a decade. The shift happened, according to the WSJ, amidst weak economic data and geopolitical uncertainty. Read more

Growth Overseas: Forecasts show higher returns for non-U.S. stocks, especially emerging markets, over the next decade, according to Morningstar. And starting yields on intermediate term bonds, which have been a good predictor of returns, suggest bonds will give U.S. equities a serious challenge. Read more

Bullish Signs: Pessimism by stock market timers is a bullish sign for contrarians, according to Mark Hulbert in a December MarketWatch column. As of then, the average recommended equity exposure measured by his sentiment index was -15.6%, one of the lowest ever. The last time it was that low was in Feb. 2016, at the bottom of a correction that began the year before. Read more

Reputation Risk: A good reputation, strong competitive advantage and popular brand make for a stock that has bad investment prospects, according to researchers at CFA Institute and Morningstar. The price of these stocks already reflects these attributes. The stocks with the worst reputation rankings outperform those with higher rankings. Read more

Bond Warning: DoubleLine's Jeffrey Gundlach calls U.S. corporate debt "horrific" and says recession indicators like junk bond spreads, consumer expectations and homebuilder confidence are flashing yellow, according to Bloomberg. He talked about these trends in his annual "Just Markets" webcast in January. Read more

Emerging Outlook: Emerging markets stocks are not as risky as people think they are, according to a recent article in Fortune that looks at the optimistic outlooks by Jeremy Grantham, Mark Mobius and Rob Arnott. Even when EM economies do slow down, they still grow faster than their mature economy counterparts. Chris Brightman of Research Affiliates says EM should return 10% a year over the next decade compared to the 3.2% annual growth seen for U.S. stocks. Read more

Stock Gains: Blackstone's Byron Wein sees a 15% gain in the S&P 500 this year. He told CNBC that growth stocks will continue to provide leadership in the market and that the economic expansion would continue this year because of consumer and government spending despite only modest gains in housing. Read more

Canadian Buffett: Bloomberg recently profiled Jim Pattison, the Canadian billionaire often compared to Warren Buffett. Pattison built an empire that includes supermarkets, fisheries, lumber and packaging as well as Ripley Entertainment. He said he still sees a lot of opportunities in the world. Read more

Repeating Mistakes: Financial advisors and investors continue to make the same mistakes in the process of hiring and firing portfolio managers, according to CFA Institute. People choosing managers focus too much on performance or outcomes and not enough on process. Read more

Timing Factors: Morningstar discussed how new research shows it's possible to successfully time factors such as value, momentum and quality. It cites a recent paper by BlackRock pointing to the four factor timing-signals that work well, but also adds its own dose of skepticism to the findings. Read more

Miller's Lessons: Bill Miller, who now manages $2 billion at his new firm Miller Value Partners, recently told Institutional Investor about the lessons he learned from the financial crisis and gives his perspective on the popularity of passive investing. Read more

AI Skeptic: Barron's recently interviewed David Harding, the founder of $27 billion Winton Capital who uses high-powered computers to pick up trading signals and patterns. He says artificial intelligence is over-hyped. He refutes the idea that you can feed a lot of data into an advanced computer model and then have it tell you what's going to happen. Read more

Yield Focus: Investors should focus on the difference between the earnings yield on stocks and the yield on cash, says Nir Kaisar in a recent Bloomberg column. When the yield on stocks is lower than the cash yield, it's a sign of trouble ahead for stocks. Read more

News on Hot List Stocks

Essent Group reported fourth-quarter net income of $128.5 million, or $1.31 a share, beating expectations.

CBRE is trying to get into the shared workspace business dominated by WeWork, by helping landlords create their own flex-space companies, WSJ reported.

TD Ameritrade shareholders approved the nomination of four directors and the company's advisory on executive pay.

Apple's new credit card in partnership with Goldman Sachs will run on the Mastercard platform.

Monolithic Power Systems reported fourth-quarter profit of 99 cents a share, meeting expectations on revenue of $153.5 million.

Performance Update

Since our last newsletter, the S&P 500 returned 2.5%, while the Hot List returned 2.4%. So far in 2019, the portfolio has returned 12.3% vs. 10.7% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 200.3% vs. the S&P's 177.4% gain.

Where Has All the Alpha Gone?

It isn't easy to beat the market. Over the long term only a few investors have been able to outpace it, consistently producing market-beating gains. But that hasn't deterred stock pickers from trying to generate alpha. They arm themselves with sophisticated models, hunting for overlooked opportunities and hoping the crowd doesn't catch on. But this becomes a self-fulfilling cycle. As the skill of managers rise and the tools improve, it becomes harder and harder to distinguish the talented from the rest of the crowd.

Michael Mauboussin wrote about this six years ago when he was at Credit Suisse, publishing an article called "Alpha and the Paradox of Skill." He set out to show how excess returns get harder to achieve as investors become more skillful. He called investing a zero-sum game in which one investor's outperformance has to be matched by another's underperformance. Epsilon Theory's Ben Hunt puts it another way: Alpha = private information. (He recently tweeted this, in fact).

What Hunt says makes sense. Having the best information and having an exclusive on it gives an investor an edge. And if he's right, it has profound implications for factor investing and active management.

It's important to note that there's a difference between alpha and outperformance. Alpha is the excess return that can't be explained by the risk you took. When the only standard was beta, calculating this difference was relatively easy. Alpha was the amount of excess return you realized above and beyond the return required given the risk of your portfolio. But then multifactor models came in to play and complicated things. Beta is not the sole measure of risk. Value and size and profitability also come into consideration. A value investor can't just get alpha from standard exposure to value. The investor needs to produce a return beyond the return that would be predicted by the exposure to value. It makes alpha harder to find.

So back to Ben Hunt's view. Does generating alpha mean you need access to information no one else has? There are three ways to generate edge in investing.

1. Having information others don't have. The information edge seems kind of obvious. But in a world where information flows freely and public companies have strict disclosure requirements, it's much harder to get a hold of juicy nuggets of information. And big data isn't going to help bring alpha back. If anything, it is removing the information edge entirely.

2. Having the ability to evaluate the information better or differently. O'Shaughnessy Asset Management points out that investing using standard factors is settled territory at this point. An investor can easily get beta exposure to something like value or quality through inexpensive ETFs An active manager who uses factors needs to add value by producing alpha beyond the standard returns of the factor itself. A select group of managers has been able to pull this off using an analytical edge. But developing this analytical edge is difficult and getting harder to do over time.

3. Having the ability to control your own behavior. An investor who can stay the course during periods of losses or underperformance when others can't has the ability to boost returns relative to most others. Some call this "behavioral alpha." But while behavior helps boost returns, it isn't alpha. For example, the ability to stick with a strategy regardless of its volatility and tracking error would allow an investor to use a more focused value strategy, which would result in more exposure to the value factor, and likely a higher return. But that wouldn't outperform the value factor itself.

Of course, a lot of people would say it doesn't really pay to focus on such details. The point of investing is to make money grow over time and reach whatever goals were set for that money. Generating alpha may matter more for bragging rights among professional managers than it is relevant to ordinary investors in the grand scheme of things. But the point is that the market is hard to beat. Having a thoughtful process that takes the emotion and guesswork out of investing is probably the best approach. At Validea we have spent a lot of time setting up models that made this systemic approach to investing easier. If you're going to attempt to generate alpha for yourself, you're going to need to have a very high conviction that you have an edge and that you have the ability to stick with your process through thick and thin. For investors who can do this, alpha is possible, even if it's not based on non-public information.


Portfolio Holdings
Ticker Date Added Return
REPYY 10/19/2018 -4.4%
RDS.A 2/8/2019 -0.9%
LUKOY 12/14/2018 10.4%
MNST 2/8/2019 1.7%
ESNT 2/8/2019 6.7%
CBRE 2/8/2019 9.0%
AMTD 2/8/2019 3.7%
MA 2/8/2019 1.3%
PAG 2/8/2019 4.0%
MPWR 2/8/2019 3.0%


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

REPYY   |   RDS.A   |   LUKOY   |   MNST   |   ESNT   |   CBRE   |   AMTD   |   MA   |   PAG   |   MPWR   |  

REPSOL SA (ADR)

Strategy: Contrarian Investor
Based on: David Dreman

Repsol, S.A. (Repsol) is an integrated energy company. The Company's segments include Upstream, Downstream, and Corporation and others. The Upstream segment carries out oil and natural gas exploration and production activities, and manages its project portfolio. The Downstream segment includes covers the supply and trading of crude oil and other products; oil refining and marketing of oil products, and the production and marketing of chemicals. It owns and operates five refineries in Spain (Cartagena, A Coruna, Bilbao, Puertollano and Tarragona) with a combined distillation capacity of approximately 900 thousand barrels of oil per day. The Company operates La Pampilla refinery in Peru, which has an installed capacity of approximately 120 thousand barrels of oil per day. Its Chemicals division produces and commercializes a range of products, and its activities range from basic petrochemicals to derivatives.

MARKET CAP: PASS

Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. REPYY has a market cap of $26,841 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. REPYY's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.41, 0.43 have been increasing, and therefore the company passes this test.


EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: PASS

This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. REPYY passes this test as its EPS growth rate over the past 6 months (13.15%) has beaten that of the S&P (-1.85%). Unfortunately though, REPYY's estimated EPS growth figures are unavailable and an opinion cannot be rendered on the second part of the test.


This methodology would utilize four separate criteria to determine if REPYY is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest".


P/E RATIO: FAIL

The P/E of a company should be in the bottom 20% of the overall market. REPYY's P/E of 10.87, based on trailing 12 month earnings, is higher than the bottom 20% criterion (below 10.60), and therefore fails this test.


PRICE/CASH FLOW (P/CF) RATIO: PASS

The P/CF of a company should be in the bottom 20% of the overall market. REPYY's P/CF of 5.44 meets the bottom 20% criterion (below 6.02) and therefore passes this test.


PRICE/BOOK (P/B) VALUE: PASS

The P/B value of a company should be in the bottom 20% of the overall market. REPYY's P/B is currently 0.78, which meets the bottom 20% criterion (below 1.00), and it therefore passes this test.


PRICE/DIVIDEND (P/D) RATIO: PASS

The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). REPYY's P/D of 16.64 meets the bottom 20% criterion (below 19.05), and it therefore passes this test.


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


CURRENT RATIO: PASS

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.18] or greater than 2). This is one identifier of financially strong companies, according to this methodology. REPYY's current ratio of 1.55 passes the test.


PAYOUT RATIO: PASS

A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for REPYY is 60.50%, while its historical payout ratio has been 61.02%. Therefore, it passes the payout criterion.


RETURN ON EQUITY: FAIL

The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 largest cap stocks, which is 18.02%, and would consider anything over 27% to be staggering. The ROE for REPYY of 7.44% is not high enough to pass this criterion.


PRE-TAX PROFIT MARGINS: PASS

This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. REPYY's pre-tax profit margin is 9.15%, thus passing this criterion.


YIELD: PASS

The company in question should have a yield that is high and that can be maintained or increased. REPYY's current yield is 6.01%, while the market yield is 2.60%. REPYY passes this test.


LOOK AT THE TOTAL DEBT/EQUITY: PASS

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 57.58%. REPYY's Total Debt/Equity of 35.72% is considered acceptable.


ROYAL DUTCH SHELL PLC (ADR)

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

The Royal Dutch Shell plc explores for crude oil and natural gas around the world, both in conventional fields and from sources, such as tight rock, shale and coal formations. The Company's segments include Integrated Gas, Upstream, Downstream and Corporate. The Integrated Gas segment is engaged in the liquefaction and transportation of gas and the conversion of natural gas to liquids to provide fuels and other products, as well as projects with an integrated activity, ranging from producing to commercializing gas. The Upstream segment includes the operations of Upstream, which is engaged in the exploration for and extraction of crude oil, natural gas and natural gas liquids, and the marketing and transportation of oil and gas, and Oil Sands, which is engaged in the extraction of bitumen from mined oil sands and conversion into synthetic crude oil. The Downstream segment is engaged in oil products and chemicals manufacturing, and marketing activities.


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. RDS.A's P/S of 0.66 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors.


TOTAL DEBT/EQUITY RATIO: PASS

Less debt equals less risk according to this methodology. RDS.A's Debt/Equity of 38.67% 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. RDS.A 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 RDS.A At this Point

Is RDS.A 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.RDS.A's P/S ratio of 0.66 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors.


LONG-TERM EPS GROWTH RATE: PASS

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. RDS.A's inflation adjusted EPS growth rate of 35.96% 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. RDS.A's free cash per share of 3.45 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. RDS.A, whose three year net profit margin averages 4.07%, fails this evaluation.



NK LUKOIL PAO (ADR)

Strategy: Value Investor
Based on: Benjamin Graham

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.


SECTOR: PASS

LUKOY is neither a technology nor financial Company, and therefore this methodology is applicable.


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $1 billion. LUKOY's sales of $116,710.0 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: FAIL

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. LUKOY's current ratio of 1.74 fails the test.


LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: PASS

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for LUKOY is $7,828.3 million, while the net current assets are $10,466.9 million. LUKOY passes this test.


LONG-TERM EPS GROWTH: FAIL

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 10 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. LUKOY's EPS growth over that period of -37.3% fails the EPS growth test.


P/E RATIO: PASS

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. LUKOY's P/E of 13.00 (using the 3 year PE) passes this test.


PRICE/BOOK RATIO: PASS

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. LUKOY's Price/Book ratio is 0.98, while the P/E is 13.00. LUKOY passes the Price/Book test.


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: FAIL

The investor should examine the P/E (33.56) relative to the growth rate (20.03%), 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 (1.68) is too high to add to the attractiveness of the stock.


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 $3,693.3 million, needs to have a P/E below 40 to pass this criterion. MNST's P/E of (33.56) 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 5.31% last year, while for this year it is 7.59%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (2.28%) is below 5%.


EPS GROWTH RATE: PASS

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for MNST is 20.0%, 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 (0.00%) 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 MNST (2.67%) 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 (3.64%) 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.


ESSENT GROUP LTD

Strategy: Growth Investor
Based on: Martin Zweig

Essent Group Ltd. is a private mortgage insurance company. The Company is engaged in offering private mortgage insurance and reinsurance for mortgages secured by residential properties located in the United States. Its products and services include mortgage insurance, contract underwriting, and Bermuda-based insurance and reinsurance. The Company's primary mortgage insurance is offered to customers on individual loans at the time of origination on a flow basis, but can also be written in bulk transactions. Its pool insurance provides additional credit enhancement for certain secondary market and other mortgage transactions. The primary mortgage insurance operations were conducted through Essent Guaranty, Inc. which is a mortgage insurer licensed to write mortgage insurance in all 50 states and the District of Columbia, as of December 31, 2016. It offers primary mortgage insurance, pool insurance and master policy. It provides contract underwriting services through CUW Solutions, 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. ESNT's P/E is 9.27, based on trailing 12 month earnings, while the current market PE is 15.00. Therefore, it passes the first test.


REVENUE GROWTH IN RELATION TO EPS GROWTH: PASS

Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. ESNT's revenue growth is 32.87%, while it's earnings growth rate is 43.45%, based on the average of the 3, 4 and 5 year historical eps growth rates. Sales growth is not at least 85% of EPS growth so the initial part of this criteria is not met, however, since both sales growth and eps growth are greater than 30%, that requirement is waived and the company passes this test.


SALES GROWTH RATE: 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 (19.9%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (23.2%) of the current year. Sales growth for the prior must be greater than the latter. For ESNT 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. ESNT's EPS ($1.31) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. ESNT's EPS for this quarter last year ($0.79) 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. ESNT's growth rate of 65.82% 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 ESNT is 21.73%. This should be less than the growth rates for the 3 previous quarters, which are 56.94%, 48.05%, and 43.90%. ESNT 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, 49.35%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 65.82%, (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, 65.82% must be greater than or equal to the historical growth which is 43.45%. ESNT 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. ESNT, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.03, 1.72, 2.41, 3.10 and 4.77, 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. ESNT's long-term growth rate of 43.45%, 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 ESNT, this criterion has not been met (insider sell transactions are 7, while insiders buying number 7). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.


CBRE GROUP INC

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

CBRE Group, Inc. is a holding company that conducts all of its operations through its subsidiaries. The Company operates as a commercial real estate services and investment company. The Company operates through the segments: The Americas; Europe, Middle East and Africa (EMEA); Asia Pacific; Global Investment Management, and Development Services. The Company provides commercial real estate services under the CBRE brand name, investment management services under the CBRE Global Investors brand name and development services under the Trammell Crow Company brand name. The Company's business is focused on commercial property, corporate facilities, project and transaction management, tenant/occupier and property/agency leasing, capital markets solutions (property sales, commercial mortgage brokerage, loan origination and servicing) real estate investment management, valuation, development services and proprietary research.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (16.12) relative to the growth rate (24.91%), 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 CBRE (0.65) makes it favorable.


SALES AND P/E RATIO: PASS

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. CBRE, whose sales are $21,340.1 million, needs to have a P/E below 40 to pass this criterion. CBRE's P/E of (16.12) 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 CBRE is 24.9%, 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 CBRE (62.75%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for CBRE should be good enough to compensate.


TD AMERITRADE HOLDING CORP.

Strategy: Growth Investor
Based on: Martin Zweig

TD Ameritrade Holding Corporation is a provider of securities brokerage services and related technology-based financial services. The Company provides its services to retail investors, traders and independent registered investment advisors (RIAs). The Company provides its services through the Internet, a national branch network and relationships with RIAs. The Company's products and services include common and preferred stock, exchange-traded funds, options, futures, foreign exchange, mutual funds, fixed income, new and secondary issue securities, margin lending, cash management services and annuities. The Company uses its platform to offer brokerage services to retail investors and investment advisors. In addition, it also offers various products and services to retail clients, such as touch-tone trading, trading over the Internet, real-time quotes, extended trading hours and direct access to market destinations.


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. AMTD's P/E is 17.93, based on trailing 12 month earnings, while the current market PE is 15.00. Therefore, it passes the first test.


REVENUE GROWTH IN RELATION TO EPS GROWTH: PASS

Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. AMTD's revenue growth is 16.01%, while it's earnings growth rate is 15.92%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, AMTD 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 (20.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (42.2%) of the current year. Sales growth for the prior must be greater than the latter. For AMTD 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. AMTD's EPS ($1.07) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. AMTD's EPS for this quarter last year ($0.40) 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. AMTD's growth rate of 167.50% 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 AMTD is 7.96%. This should be less than the growth rates for the 3 previous quarters, which are 20.00%, 79.55%, and 100.00%. AMTD 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, 66.94%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 167.50%, (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, 167.50% must be greater than or equal to the historical growth which is 15.92%. AMTD 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. AMTD, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.42, 1.49, 1.58, 1.64 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. AMTD's long-term growth rate of 15.92%, 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. For AMTD, this criterion has been met, indicating an insider buy signal.


MASTERCARD INC

Strategy: Growth Investor
Based on: Martin Zweig

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.


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. MA's P/E is 39.72, based on trailing 12 month earnings, while the current market PE is 15.00. Therefore, it passes the first test.


REVENUE GROWTH IN RELATION TO EPS GROWTH: FAIL

Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. MA's revenue growth is 13.37%, while it's earnings growth rate is 16.71%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, MA 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 (14.9%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (14.7%) of the current year. Sales growth for the prior must be greater than the latter. For MA 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. MA's EPS ($0.79) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. MA's EPS for this quarter last year ($0.94) pass this test.


POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: FAIL

The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. MA's growth rate of -15.96% fails 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 MA is 8.36%. This should be less than the growth rates for the 3 previous quarters, which are 41.00%, 36.36%, and 35.82%. MA passes this test, which means that it has good, reasonably steady earnings.


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


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

If the growth rate of the prior three quarter's earnings, 37.50%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, -15.96%, (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 MA is -16.0%, and it would therefore fail this test.


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

The EPS growth rate for the current quarter, -15.96% must be greater than or equal to the historical growth which is 16.71%. Since this is not the case MA 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. MA, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 3.09, 3.35, 3.69, 4.38 and 5.52, 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. MA's long-term growth rate of 16.71%, 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 MA, this criterion has not been met (insider sell transactions are 2, while insiders buying number 5). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.


PENSKE AUTOMOTIVE GROUP, INC.

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

Penske Automotive Group, Inc. is an international transportation services company. The Company operates automotive and commercial truck dealerships principally in the United States, Canada and Western Europe, and distributes commercial vehicles, diesel engines, gas engines, power systems, and related parts and services principally in Australia and New Zealand. The Company's segments include Retail Automotive, consisting of its retail automotive dealership operations; Retail Commercial Truck, consisting of its retail commercial truck dealership operations in the United States and Canada; Other, consisting of its commercial vehicle and power systems distribution operations and other non-automotive consolidated operations, and Non-Automotive Investments, consisting of its equity method investments in non-automotive operations. The Company holds interests in Penske Truck Leasing Co., L.P. (PTL), a provider of transportation services and supply chain management.


DETERMINE THE CLASSIFICATION:

PAG is considered a "True Stalwart", according to this methodology, as its earnings growth of 14.31% lies within a moderate 10%-19% range and its annual sales of $22,785 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. PAG is attractive if PAG can hold its own during a recession.


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

The Yield-adjusted P/E/G ratio for PAG (0.45), 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. PAG's EPS ($5.52) would satisfy this criterion.


TOTAL DEBT/EQUITY RATIO: FAIL

PAG's Debt/Equity (228.02%) is above 80% and is considered very weak. Therefore, PAG fails this test.


MONOLITHIC POWER SYSTEMS, INC.

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

Monolithic Power Systems, Inc. designs, develops and markets integrated power semiconductor solutions and power delivery architectures. The Company operates in the design, development, marketing and sale of power solutions for the communications, storage and computing, consumer and industrial markets segment. The Company's product families include Direct Current (DC) to DC Products, and Lighting Control Products. The Company's DC to DC integrated circuits (ICs) are used to convert and control voltages within a range of electronic systems, such as portable electronic devices, wireless local area network (LAN) access points, computers, monitors, automobiles and medical equipment. Lighting control ICs are used in backlighting and general illumination products. In addition to Alternating Current (AC)/DC offline solutions for lighting illumination applications, the Company also offers AC/DC power conversion solutions for end products that plug into a wall outlet.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: FAIL

The investor should examine the P/E (56.33) relative to the growth rate (33.03%), 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 MPWR (1.71) is too high to add to the attractiveness of the stock.


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. MPWR, whose sales are $582.4 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 MPWR was 21.08% last year, while for this year it is 23.42%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (2.34%) is below 5%.


EPS GROWTH RATE: PASS

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for MPWR is 33.0%, 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 MPWR (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.



Watch List

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

Ticker Company Name Current
Score
NSIT INSIGHT ENTERPRISES, INC. 75%
TX TERNIUM SA (ADR) 72%
CDW CDW CORP 70%
BMA BANCO MACRO SA (ADR) 59%
TSCO TRACTOR SUPPLY COMPANY 53%
TECK TECK RESOURCES LTD (USA) 53%
ATH ATHENE HOLDING LTD 53%
HBI HANESBRANDS INC. 52%
NSP INSPERITY INC 52%
PCTY PAYLOCITY HOLDING CORP 52%



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