The Economy

The increase in equity prices since the June 23rd Brexit referendum has been supported by strengthening economic data, as the manufacturing and non-manufacturing sectors both reported expansions in June, while the June unemployment data bounced back following a dismal report for May.

The manufacturing sector expanded for the fourth consecutive month in June, according to the Institute for Supply Management. The group's June manufacturing index registered 53.2%, an increase of 1.9% from the May reading and the highest reading since Feb. 2015. The New Orders Index also increased, up 1.3% to 57%, while the Employment Index increased 1.2% from the May reading to 50.4%. The Prices Index indicated higher raw materials prices for the fourth consecutive month. The June PMI of 53.2% indicates growth of the overall economy for the 85th consecutive month and the reading corresponds to a 3.2% increase in real annualized gross domestic product.

Economic activity in the non-manufacturing sector grew in June for the 77th consecutive month, also according to the Institute for Supply Management. June's non-manufacturing (service sector) index registered 56.5%, an increase of 3.6% over the May reading. This reading is well above the level that indicates expansion of the overall economy and represents the 83rd consecutive month of such expansion. The New Orders Index rose 5.7% over that in May, while the Employment Index grew 3%, following a one-month contraction in May. Prices paid by non-manufacturing organizations for purchased materials and services increased in June for the 3rd consecutive month. The June NMI reading of 56.5% corresponds to a 3% increase in annualized gross domestic product.

After a surprisingly low increase of only 11,000 jobs (revised down from 38,000) in May, the June jobs report showed a robust increase of 287,000 jobs, which was above economists' expectations. Consensus was a 180,000 increase in June. It should be noted that the June jobs data was inflated by the return of approximately 35,000 Verizon workers who were on strike the previous month. The unemployment rate increased 0.2% to 4.9% in June, as there was an increase -- 347,000 -- in the number of people who were considered unemployed. That's not necessarily bad -- the number of people considered not in the labor force fell by 191,000, in part because many who had dropped out of the labor force returned. The increases in the number of unemployed people and the unemployment rate largely offset declines in May and brought both measures back in line with levels that had prevailed from August 2015 to April, according to the report. The "U-6" rate, which unlike the headline number takes into account those working part-time who want full-time work, and discouraged workers who have given up looking for a job, showed a decline, falling 0.1% to 9.6%.

The June unemployment report also showed modestly positive news regarding wages, as average hourly earnings rose two cents to $25.61, following a 6-cent increase in May. Over the year, average hourly earnings have risen by 2.6%.

The private sector added 172,000 jobs in June, according to payroll processor ADP. The firm also revised its May jobs number downward from 173,000 to 168,000. The service sector continues to drive the gains, adding 208,000 jobs, while the goods-producing sector extended a contraction, losing 36,000 jobs after a loss of 5,000 jobs in May.

The FOMC released the minutes of their June 14-15 meeting on July 6th and officials indicate no change in policy will take place at the July 26-27 policy meeting. Mixed economic data as well as the vote by the United Kingdom to exit the European Union were cited as factors considered in the decision to forego an imminent rate hike. According to the Wall Street Journal, Fed officials generally agreed at their June 14-15 meeting that it was 'prudent to wait' for additional data before considering another rate rise. And, more time appears necessary to observe the state of the economy in the wake of the June 23rd Brexit vote. Concerns over Brexit also followed a surprisingly weak May jobs report as well as a downside surprise in payrolls in April.

As for oil and gas prices, oil has been on the decline from a reading in the high-$40 price range to roughly the $45 level. A gallon of regular unleaded gas, on average, cost $2.22 on July 14th, down from $2.37 a month earlier, according to AAA. That's about 20% below where it was a year ago.

Overall since our last newsletter, the S&P 500 returned 3.1%, while the Hot List returned 4.3%. For the year, the portfolio stands at 5.4% vs. 5.9% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 197.0% vs. the S&P's 116.3% gain.



Portfolio Update: Outperforming the S&P 500 With Solid Gains

The past two weeks have been good ones for the Hot List, as eight of the ten holdings posted gains, with one issue rising 9.5%, while the best performer was up over 13%.

Leading the way with gains was Thor Industries (THO), which was up 13.25%. THO manufactures and sells various recreational vehicles (RV) throughout the United States and Canada, as well as related parts and accessories. On July 1, THO announced the acquisition of Jayco Corp., in a $576 million all-cash transaction, which is expected to expand THO's exposure in recreational vehicles (RVs), traveling and camping trailers, high-end diesel Class A and large Class C motorhomes. Over time, the acquisition is expected to help Thor Industries lower its overall cost and improve earnings. THO has a 21.6% return on equity and offers a 1.7% dividend yield.

Next in line with a 9.5% gain was Caleres Inc. (CAL). Formerly known as Brown Shoe Company, Inc., Caleres is a global footwear retailer and wholesaler. It operates through two segments: Famous Footwear and Brand Portfolio. The Famous Footwear segment includes Famous Footwear stores, as well as Famous.com, and is a family branded footwear retailer with around 1,038 stores. The Brand Portfolio segment offers retailers and consumers a portfolio of brands by designing, sourcing and marketing branded footwear for women and men, selling to wholesalers and consumers. Retailers have had a good run in post-Brexit referendum trading and Caleres has not been left behind. Caleres' ($1 billion market cap) Price/Sales Ratio of 0.43, based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes Kenneth Fisher's Price/Sales Ratio test with flying colors.

Another top performer in the Hot List was Drew Industries (DW), which was up 6.35%. Indiana-based Drew is a supplier to the recreational vehicle and manufactured homes industries. Through its subsidiaries, Lippert Components, Inc. and Kinro, Inc., it produces a range of components, including windows, doors, chassis, chassis parts, bath and shower units, axles, upholstered furniture, awnings and slide-out mechanisms for RVs. It also makes components for modular housing, truck caps and buses, and trailers used to haul boats, livestock, equipment, and cargo. Drew ($2.17 billion market cap) has a 21.6% return on equity and a dividend yield of 1.4%. Drew's EPS growth over a 10-year period is 60.9%, passing the Benjamin Graham Long Term EPS Growth test.

Other issues producing gains in excess of 5% over the past two weeks were Polaris Industries Inc. (PII) and Banco Macro SA (BMA), which were up 7.3 % and 6.6%, respectively.

On the downside, Valero Energy Corp. (VLO) continued to slide, losing 1.8%, the largest loss in the portfolio over the past two weeks. The decline in the share price of Valero occurred despite an easing in the price of oil over the past two weeks and pushed the stock down to a new 52-week low. No specific news on Valero appeared to fuel the continued slide.

The other loss posted in the Hot List portfolio was in Anika Therapeutics (ANIK), the Massachusetts-based orthopedic medicines firm. The Company offers therapeutic pain management solutions. It is engaged in developing, manufacturing and commercializing approximately 20 products based on its hyaluronic acid (HA) technology. As was the case with Valero, there appeared to be no news associated with Anika' underperformance. The stock has declined 1.5% since the last issue of the Hot List.

Overall, the Hot List did well over the past two weeks, with six of the ten issues outperforming the S&P 500. In two weeks, we'll perform our regularly scheduled rebalancing. At that time, we will sell any holdings whose relative scores have fallen significantly and replace them with new stocks that score highly on my models.

Recommended Reading

Although equities have essentially recovered following the post-Brexit sell-off, with the S&P 500 advancing to new record highs this week, there is still worry about the political and economic uncertainty that looms in its wake. Earlier this month, Steve Russolillo of The Wall Street Journal wrote that eighteen equity strategists tracked by the research firm Birinyi Associates anticipate the S&P 500 will end the year at around 2150 (down from their previous forecast of 2200). The index closed at 2164 on July 14th, modestly surpassing the consensus forecast for year-end.

Seven of the group have lowered their year-end predictions since January, although many held steady. After the Brexit vote, David Bianco of Deutsche Bank reduced his by 50 points (to 2150) based on his expectation that the vote will weigh heavily on U.S. earnings. The fact that we're looking down the barrel at the presidential election doesn't help the situation. Jeffrey Hirsch, editor of the Stock Trader's Almanac, reports that since 1950, the S&P 500 has averaged a 0.9% gain during the third quarter (a historically tough period for the markets to begin with). To add insult to market injury, the eighth year of a presidency has been typically weak for stocks. As the year moves on, it will be interesting to track these forecasts to see who got it right in 2016. It may be interesting to note that in my book, The Guru Investor, published in 2009, I noted that market forecasters seldom get it right, despite getting so much publicity and air time. In fact, despite perceived knowledge regarding the future direction of the stock market, odds are, four out of every five times their "expert" opinion will be wrong. Thus, although The Wall Street Journal piece makes for interesting reading and consideration, adjusting portfolios based on such information may result in underperformance throughout the remainder of the year.



Guru Spotlight: James O'Shaughnessy

The investing techniques of James O'Shaughnessy, the subject of the Guru Spotlight in this week's Hot List Newsletter, heartily debunk the "random walk" theory of stock market price action. The basis of this theory is straightforward: stock market prices fluctuate according to a random walk and, as a result, cannot be predicted. While stock market price predictions do typically leave much to be desired, as noted in this week's Recommended Reading section of the Newsletter, James O'Shaughnessy, through exhaustive testing, has proven that stock prices do indeed move with a "purposeful stride."

O'Shaughnessy is a force behind quantitative trading and, in his 1996 book What Works on Wall Street, he published the findings - historical performance data - of exhaustive research on various stock selection strategies. Back-testing of a myriad of quantitative approaches, between 1954 and 1996, was performed using Standard & Poor's Compustat database, with the results demonstrating how various strategies performed in terms of returns over the long term. O'Shaughnessy was also able to determine how risky or volatile each strategy he tested was. And, the end result of his work - an approach that produced the best risk-adjusted returns - is his "United Cornerstone" strategy. The approach is actually a combination of two models O'Shaughnessy tested: a growth-focused method called Cornerstone Growth and a value-focused method called Cornerstone Value. Together, these two strategies produced impressive results, averaging a compound return of 17.1% from 1954 through 1996, beating the S&P 500's 11.5% compound return during that time period while also maintaining low levels of risk.

Although the term "quantitative strategy" may bring to mind a plethora of complex formulae and criteria, O'Shaughnessy's strategy is quite simple. In fact, he uses very few criteria and there are no formulas or confusing ratios that you need a PhD in mathematics to decipher. To the contrary, on the importance of staying simple and using only easy-to-understand ratios, O'Shaughnessy says: "If the math gets higher than algebra, it's pretty certain you will lose your money. If you look back to the most spectacular blow ups in history, you can always tie them to a couple things: They were extraordinary complicated strategies that maybe even the practitioners themselves didn't understand and they were overleveraged.

Specifically, O'Shaughnessy's key investment strategies are defined as follows: Cornerstone Growth favors companies with a market capitalization of at least $150 million and a price/sales ratio below 1.5. It also looks for companies with persistent earnings growth over a five-year period, and shares that have been among the market's best performers over the prior 12 months. This strategy makes sense for value-oriented growth investors who have the patience and personality to stick with a purely quantitative investment approach. Cornerstone Value looks for large companies with strong sales and cash flows, and solid dividend yields. It is appropriate for income-oriented investors.

At Validea, we have developed the Growth & Value Investor portfolio based on O'Shaughnessy's Cornerstone Strategies. This two strategy approach offers a large-cap value model and a growth approach that looks for persistent earning growth and strong relative strength. The O'Shaughnessy-based portfolio will pick stocks using both the growth and value methods, picking whatever the best-rated stocks are at the time, regardless of growth/value distinction, meaning the portions of the portfolio made up of growth and value stocks can vary over time. The portfolio is heavily currently biased toward growth stocks. Here's a look at the current holdings:

HII, HUNTINGTON INGALLS INDUSTRIES(Growth)
HPQ, HP INC(Value)
IIIN, INSTEEL INDUSTRIES (Growth)
IOSP, INNOSPEC (Growth)
LDL, LYDALL (Growth)
LUKOY, NK LUKOIL PAO (Value)
LUV, SOUTHWEST AIRLINES (Growth)
MET, METLIFE (Value)
SIGI, SELECTIVE INSURANCE GROUP (Growth)
THG, HANOVER INSURANCE GROUP (Growth)
THO, THOR INDUSTRIES (Growth)
TRV, TRAVELERS COMPANIES (Growth)
UFPI, UNIVERSAL FOREST PRODUCTS (Growth)
BLD, TOPBUILD CORP (Growth)
CORE, COREMARK HOLDING COMPANY (Growth)
ITUB, ITAU UNIBANCO HOLDING SA (Value)
JBSS, JOHN B. SANFILIPPO (Growth)
SLF, SUN LIFE FINANCIAL (Growth)
ALK, ALASKA AIR GROUP (Growth)
DW, DREW INDUSTRIES (Growth)

Since 2003, this portfolio has returned 172.9%, outperforming the market by 59.3% using its optimal quarterly rebalancing period and 20 stock portfolio size. While the portfolio has underperformed versus the S&P 500 year-to-date, yielding 2.3% versus the S&P 500's return of 4.6%, this strategy has stood the test of time and is bound to go through periods of underperformance, as is any strategy. And, as O'Shaughnessy notes in What Works on Wall Street, in order to beat the market, it is crucial that you stay disciplined: "[C]onsistently, patiently, and slavishly stick with a strategy, even when it's performing poorly relative to other methods." Keeping emotions out of the equation will help avoid undisciplined decisions which, undoubtedly, "play havoc with our ability to invest our money successfully."



News about Validea Hot List Stocks

As noted in the Portfolio Update, on July 1st Thor Industries (THO) recently announced the acquisition of Jayco Corp., in a $576 million all-cash transaction, which is expected to expand Thor's exposure in recreational vehicles (RVs), traveling and camping trailers, high-end diesel Class A and large Class C motorhomes.

LGI Homes Inc. (LGIH) announced 355 homes closed in June 2016, up from 331 home closings in June 2015, representing year-over-year growth of 7.3%. In addition, the Company announced record-breaking quarterly home closings of 1,128 for the second quarter of 2016, finishing out the first six months of the year with 1,972 home closings, a 29.4% increase over 1,524 home closings during the first six months of 2015. As of the end of June 2016, the Company had 56 active selling communities.



The Next Issue

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

Portfolio Holdings
Ticker Date Added Return
BMA 7/1/2016 7.1%
ANIK 5/6/2016 19.6%
ORA 7/1/2016 2.1%
EGOV 7/1/2016 4.8%
LGIH 7/1/2016 0.3%
VLO 6/3/2016 -8.6%
PII 6/3/2016 4.8%
THO 2/12/2016 48.0%
CAL 6/3/2016 5.5%
DW 7/1/2016 4.9%


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

BMA   |   ANIK   |   ORA   |   EGOV   |   LGIH   |   VLO   |   PII   |   THO   |   CAL   |   DW   |  

BANCO MACRO SA (ADR)

Strategy: Contrarian Investor
Based on: David Dreman

Banco Macro S.A. (the Bank) is a bank. The Bank offers traditional bank products and services to companies, including those operating in regional economies, as well as to individuals. The Bank offers savings and checking accounts, credit and debit cards, consumer finance loans (including personal loans), mortgage loans, automobile loans, overdrafts, credit-related services, home and car insurance coverage, tax collection, utility payments, automatic teller machines (ATMs) and money transfers. The Bank offers Plan Sueldo payroll services, lending, corporate credit cards, mortgage finance, transaction processing and foreign exchange. The Bank offers transaction services to its corporate customers, such as cash management, customer collections, payments to suppliers, payroll administration, foreign exchange transactions, foreign trade services, corporate credit cards and information services, such as its Datanet and Interpymes services.

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. BMA has a market cap of $4,698 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. BMA's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.17, 1.64 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. BMA passes this test as its EPS growth rate over the past 6 months (583.33%) has beaten that of the S&P (-13.84%). BMA's estimated EPS growth for the current year is (1,006.45%), which indicates the company is expected to experience positive earnings growth. As a result, BMA passes this test.


This methodology would utilize four separate criteria to determine if BMA 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. BMA's P/E of 12.69, based on trailing 12 month earnings, is higher than the bottom 20% criterion (below 12.29), and therefore fails this test.


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

The P/CF of a company should be in the bottom 20% of the overall market. BMA's P/CF of 12.22 does not meet the bottom 20% criterion (below 7.09), and therefore fails this test.


PRICE/BOOK (P/B) VALUE: FAIL

The P/B value of a company should be in the bottom 20% of the overall market. BMA's P/B is currently 3.82, which does not meet the bottom 20% criterion (below 0.94), and it therefore fails this test.


PRICE/DIVIDEND (P/D) RATIO: FAIL

The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). BMA's P/D of 303.03 does not meet the bottom 20% criterion (below 19.76), and it therefore fails this test.


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


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 BMA is 0.00%, while its historical payout ratio has been 19.69%. Therefore, it passes the payout criterion.


RETURN ON EQUITY: PASS

The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 15.97%, and would consider anything over 27% to be staggering. The ROE for BMA of 35.04% is high enough to pass this criterion.


PRE-TAX PROFIT MARGINS: PASS

This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. BMA's pre-tax profit margin is 41.84%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. BMA's current yield is 0.33%, while the market yield is 2.66%. BMA fails this test.

ANIKA THERAPEUTICS INC

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

Anika Therapeutics, Inc. is an orthopedic medicines company. The Company offers therapeutic pain management solutions. It is engaged in developing, manufacturing and commercializing approximately 20 products based on its hyaluronic acid (HA) technology. It orthopedic medicine portfolio consists of marketed (ORTHOVISC and MONOVISC) and pipeline (CINGAL and HYALOFAST in the United States) products to alleviate pain and restore joint function by replenishing depleted HA and aiding cartilage repair and regeneration. Its therapeutic offerings consist of products in the areas, such as Orthobiologics, Dermal, Surgical, Ophthalmic and Veterinary. It offers products made from HA based on two technologies: HYAFF, which is a solid form of HA, and ACP gel, an autocross-linked polymer of HA. Its orthobiologics products primarily consist of viscosupplementation and regenerative orthopedics products. Its viscosupplementation franchise includes ORTHOVISC, ORTHOVISC mini, MONOVISC, and CINGAL.


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. ANIK's profit margin of 34.22% passes this test.


RELATIVE STRENGTH: PASS

The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. ANIK, with a relative strength of 91, satisfies this test.


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

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for ANIK (95.65% for EPS, and 43.56% for Sales) are good enough to pass.


INSIDER HOLDINGS: FAIL

ANIK's insiders should own at least 10% (they own 2.12%) of the company's outstanding shares. This does not satisfy the minimum requirement, and companies that do not pass this criteria are less attractive.


CASH FLOW FROM OPERATIONS: PASS

A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. ANIK's free cash flow of $1.95 per share passes this test.


PROFIT MARGIN CONSISTENCY: PASS

ANIK's profit margin has been consistent or even increasing over the past three years (Current year: 33.08%, Last year: 36.29%, Two years ago: 27.41%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.


R&D AS A PERCENTAGE OF SALES: PASS

ANIK is either maintaining the same levels of R&D expenditures(currently $9.0 million) or increasing these levels which is a good sign. This allows the company to develop the superior technology and new products that will put everyone else out of business. This criterion is particularly important for high-tech and medical stocks because they are so R&D dependant.


CASH AND CASH EQUIVALENTS: PASS

ANIK's level of cash $138.5 million passes this criteria. If a company is a cash generator, like ANIK, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.


INVENTORY TO SALES: PASS

This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for ANIK was 11.75% last year, while for this year it is 16.06%. Although the inventory to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive.


ACCOUNT RECEIVABLE TO SALES: PASS

This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for ANIK was 16.24% last year, while for this year it is 23.28%. 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.


LONG TERM DEBT/EQUITY RATIO: PASS

ANIK's trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don't need to borrow money in order to grow.


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

The "Fool Ratio" is an extremely important aspect of this analysis. If the company's Fool Ratio is between 0.5 and 0.65 (ANIK's is 0.63), the company demonstrates excellence in its fundamentals and have soundly beat the earnings estimates. ANIK passes this test.

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

AVERAGE SHARES OUTSTANDING: PASS

ANIK has not been significantly increasing the number of shares outstanding within recent years which is a good sign. ANIK currently has 15.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.


SALES: PASS

Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. ANIK's sales of $99.8 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". ANIK passes the sales test.


DAILY DOLLAR VOLUME: PASS

ANIK passes the Daily Dollar Volume (DDV of $8.3 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf."


PRICE: PASS

This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. ANIK with a price of $52.64 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.


INCOME TAX PERCENTAGE: PASS

ANIK's income tax paid expressed as a percentage of pretax income this year was (36.27%) and last year (37.71%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.

ORMAT TECHNOLOGIES, INC.

Strategy: Growth Investor
Based on: Martin Zweig

Ormat Technologies, Inc. is engaged in the geothermal and recovered energy power business. The Company designs, develops, builds, owns and operates geothermal and recovered energy-based power plants. The Company's equipment manufacturing operations are located in Israel. The Company conducts its business activities in two business segments: Electricity segment and Product segment. The Company's Electricity segment develops, builds, owns and operates geothermal and recovered energy-based power plants in the United States and geothermal power plants in other countries around the world, and sells the electricity it generates. The Company's Product Segment designs, manufactures and sells equipment for geothermal and recovered energy-based electricity generation, remote power units and other power generating units, and provide services relating to the engineering, procurement, construction, operation and maintenance of geothermal, and recovered energy-based power plants.


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. ORA's P/E is 16.26, 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. ORA's revenue growth is 7.68%, while it's earnings growth rate is 26.67%, based on the average of the 2 and 5 year historical and the current year eps growth rates. Therefore, ORA 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 (26.1%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (14.6%) of the current year. Sales growth for the prior must be greater than the latter. For ORA 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. ORA's EPS ($0.59) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. ORA's EPS for this quarter last year ($0.21) 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. ORA's growth rate of 180.95% 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 ORA is 13.34%. This should be less than the growth rates for the 3 previous quarters, which are 40.00%, 291.67%, and 206.67%. ORA 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, 202.82%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 180.95%, (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 ORA is 181.0%, and it would therefore pass this test.


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

The EPS growth rate for the current quarter, 180.95% must be greater than or equal to the historical growth which is 26.67%. ORA would therefore pass this test.


EARNINGS PERSISTENCE: FAIL

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. ORA, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were -1.00, -4.77, 0.80, 1.18, and 2.43, 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. ORA's long-term growth rate of 26.67%, 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. ORA's Debt/Equity (89.44%) is not considered high relative to its industry (139.77%) 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 ORA, this criterion has not been met (insider sell transactions are 175, while insiders buying number 111). 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.

NIC INC.

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

NIC Inc. is a provider of digital government services that help governments use technology. The Company operates through Outsourced Portals segment. The Other Software & Services category includes its subsidiaries that provide software development and services, other than outsourced portal services, to state and local governments, as well as federal agencies. The Company offers its services through two channels: primary outsourced portal businesses, and software & services businesses. In its primary outsourced portal businesses, it enters into long-term contracts with state and local governments to design, build, and operate Internet-based, enterprise-wide portals on their behalf. These portals consist of Websites and applications that the Company has built to allow businesses and citizens to access government information online and secure transactions, such as applying for a permit, retrieving government records, or filing a government-mandated form or report.


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. EGOV's profit margin of 15.29% 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 EGOV'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 EGOV (35.71% for EPS, and 11.41% for Sales) are not good enough to pass.


INSIDER HOLDINGS: FAIL

EGOV's insiders should own at least 10% (they own 4.39%) of the company's outstanding shares. This does not satisfy the minimum requirement, and companies that do not pass this criteria are less attractive.


CASH FLOW FROM OPERATIONS: PASS

A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. EGOV's free cash flow of $0.69 per share passes this test.


PROFIT MARGIN CONSISTENCY: PASS

EGOV's profit margin has been consistent or even increasing over the past three years (Current year: 14.36%, Last year: 14.36%, Two years ago: 12.85%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.


R&D AS A PERCENTAGE OF SALES: FAIL

EGOV did not have any R&D expenditures for the current year which is unacceptable. EGOV could be jepordizing the future in order to boost current EPS numbers.


CASH AND CASH EQUIVALENTS: PASS

EGOV's level of cash $98.4 million passes this criteria. If a company is a cash generator, like EGOV, 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 EGOV was 21.12% last year, while for this year it is 27.48%. 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.


LONG TERM DEBT/EQUITY RATIO: PASS

EGOV's trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don't need to borrow money in order to grow.


"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. EGOV's PEG Ratio of 2.00 is excessively high.

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

AVERAGE SHARES OUTSTANDING: PASS

EGOV has not been significantly increasing the number of shares outstanding within recent years which is a good sign. EGOV currently has 66.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.


SALES: PASS

Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. EGOV's sales of $300.4 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". EGOV passes the sales test.


DAILY DOLLAR VOLUME: PASS

EGOV passes the Daily Dollar Volume (DDV of $6.2 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf."


PRICE: PASS

This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. EGOV with a price of $22.93 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.


INCOME TAX PERCENTAGE: PASS

EGOV's income tax paid expressed as a percentage of pretax income this year was (37.62%) and last year (38.03%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.

LGI HOMES INC

Strategy: Growth Investor
Based on: Martin Zweig

LGI Homes, Inc. is a homebuilder. The Company is engaged in the design, construction, marketing and sale of new homes in markets in Texas, Arizona, Florida, Georgia, New Mexico, South Carolina, North Carolina, Colorado, Washington and Tennessee. The Company has five segments: the Texas division, the Southwest division, the Southeast division, the Florida division and the Northwest division. The Texas division includes homebuilding operations in Houston, Dallas/Fort Worth, San Antonio and Austin locations. The Southwest division includes homebuilding operations in Phoenix, Tucson, Albuquerque, Denver and Colorado Springs locations. The Southeast division includes homebuilding operations in Atlanta, Charlotte and Nashville locations. The Florida division includes homebuilding operations in Tampa, Orlando, Fort Myers and Jacksonville locations. The Northwest division includes homebuilding operations in Seattle location. Its product offerings include entry-level homes and move-up homes.


P/E RATIO: PASS

The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. LGIH's P/E is 12.17, 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. LGIH's revenue growth is 94.39%, while it's earnings growth rate is 81.68%, based on the average of the 3 and 4 year historical eps growth rates. Therefore, LGIH 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 (34.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (63%) of the current year. Sales growth for the prior must be greater than the latter. For LGIH 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. LGIH's EPS ($0.57) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. LGIH's EPS for this quarter last year ($0.33) pass this test.


POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS

The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. LGIH's growth rate of 72.73% 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 LGIH is 40.84%. This should be less than the growth rates for the 3 previous quarters, which are 53.49%, 123.53%, and 111.76%. LGIH 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, 92.79%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 72.73%, (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 LGIH is 72.7%, 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, 72.73% must be greater than or equal to the historical growth which is 81.68%. Since this is not the case LGIH would therefore fail this test.


EARNINGS PERSISTENCE: PASS

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. LGIH, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.17, 0.50, 1.07, 1.33 and 2.44, passes this test.


LONG-TERM EPS GROWTH: PASS

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. LGIH's long-term growth rate of 81.68%, based on the average of the 3 and 4 year historical eps growth rates, passes this test.


TOTAL DEBT/EQUITY RATIO: FAIL

A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. LGIH's Debt/Equity (122.62%) is considered high relative to its industry (57.83%) and fails this test.


INSIDER TRANSACTIONS: PASS

A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For LGIH, this criterion has not been met (insider sell transactions are 59, while insiders buying number 33). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.

VALERO ENERGY CORPORATION

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

Valero Energy Corporation (Valero), through Valero Energy Partners LP (VLP), owns, operates, develops and acquires crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets. The Company operates in two segments: refining and ethanol. Its refining segment includes refining and marketing operations in the United States, Canada, the United Kingdom, Aruba and Ireland. Its ethanol segment includes ethanol and marketing operations in the United States. VLP's assets include crude oil and refined petroleum products pipeline and terminal systems in the United States Gulf Coast and the United States Mid-Continent regions. Its refineries can produce conventional gasolines, premium gasolines, gasoline meeting the specifications of the California Air Resources Board (CARB), diesel, low-sulfur diesel, ultra-low-sulfur diesel, CARB diesel, other distillates, jet fuel, asphalt, petrochemicals, lubricants and other refined products.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (7.10) relative to the growth rate (23.73%), 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 VLO (0.30) 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. VLO, whose sales are $82,188.0 million, needs to have a P/E below 40 to pass this criterion. VLO's P/E of (7.10) 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 VLO was 5.06% last year, while for this year it is 6.72%. 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 (1.66%) 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 VLO is 23.7%, 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 VLO (35.51%) 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 VLO (12.48%) 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 VLO (-13.09%) 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.

POLARIS INDUSTRIES INC.

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

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


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (14.24) relative to the growth rate (20.50%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for PII (0.69) makes it favorable.


SALES AND P/E RATIO: PASS

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. PII, whose sales are $4,668.9 million, needs to have a P/E below 40 to pass this criterion. PII's P/E of (14.24) is considered acceptable.


INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for PII was 12.63% last year, while for this year it is 15.04%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (2.42%) is below 5%.


EPS GROWTH RATE: PASS

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for PII is 20.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.


TOTAL DEBT/EQUITY RATIO: PASS

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


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for PII (0.87%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for PII (-6.42%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.

THOR INDUSTRIES, INC.

Strategy: Growth Investor
Based on: Martin Zweig

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


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. THO's P/E is 15.82, 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. THO's revenue growth is 13.71%, while it's earnings growth rate is 19.29%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, THO fails this criterion.


SALES GROWTH RATE: FAIL

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (9.3%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (14.4%) of the current year. Sales growth for the prior must be greater than the latter. For THO 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. THO's EPS ($1.51) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. THO's EPS for this quarter last year ($1.19) 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. THO's growth rate of 26.89% 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 THO is 9.65%. This should be less than the growth rates for the 3 previous quarters which are 4.80%, 32.88% and 50.88%. THO 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, 23.14%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 26.89%, (versus the same quarter one year ago) then the stock passes.


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

The EPS growth rate for the current quarter, 26.89% must be greater than or equal to the historical growth which is 19.29%. THO 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. THO, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.66, 2.07, 2.86, 3.29 and 3.79, 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. THO's long-term growth rate of 19.29%, 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. THO's Debt/Equity (0.00%) is not considered high relative to its industry (7.06%) 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. Zweig calls this an insider buy signal. For THO, this criterion has not been met (insider sell transactions are 174, while insiders buying number 21). 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.

CALERES INC

Strategy: Value Investor
Based on: Benjamin Graham

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


SECTOR: PASS

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


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. CAL's sales of $2,559.9 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: PASS

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. CAL's current ratio of 2.52 passes the test.


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

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for CAL is $196.7 million, while the net current assets are $479.6 million. CAL passes this test.


LONG-TERM EPS GROWTH: PASS

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. CAL's EPS growth over that period of 30.3% passes the EPS growth test.


P/E RATIO: FAIL

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. CAL's P/E of 15.90 (using the 3 year PE) fails this test.


PRICE/BOOK RATIO: FAIL

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. CAL's Price/Book ratio is 1.89, while the P/E is 15.90. CAL fails the Price/Book test.

DREW INDUSTRIES, INC.

Strategy: Value Investor
Based on: Benjamin Graham

Drew Industries Incorporated, through its subsidiaries, supplies an array of components in the United States and abroad for the manufacturers of recreational vehicles (RVs) and manufactured homes. The Company also supplies components for adjacent industries, including buses; trailers used to haul boats, livestock, equipment and other cargo; pontoon boats; modular housing, and mobile office units. It operates in two segments, which include the recreational vehicle products segment (the RV Segment), and the manufactured housing products segment (the MH Segment). RVs are motorized (motorhomes) or towable, such as travel trailers, fifth-wheel travel trailers, folding camping trailers and truck campers. It manufactures and distributes a range of products used primarily in the production of RVs and manufactured homes, such as electronic components, windows, slide-out mechanisms and solutions, furniture and mattresses, chassis components, and thermoformed bath, kitchen and other products.


SECTOR: PASS

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


SALES: PASS

The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. DW's sales of $1,464.4 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: PASS

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. DW's current ratio of 2.07 passes the test.


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

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for DW is $49.9 million, while the net current assets are $165.8 million. DW passes this test.


LONG-TERM EPS GROWTH: PASS

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. DW's EPS growth over that period of 60.9% passes the EPS growth test.


P/E RATIO: FAIL

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. DW's P/E of 24.66 (using the current PE) fails this test.


PRICE/BOOK RATIO: FAIL

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. DW's Price/Book ratio is 4.72, while the P/E is 24.66. DW fails the Price/Book test.


Watch List

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

Ticker Company Name Current
Score
UTHR UNITED THERAPEUTICS CORPORATION 65%
UFPI UNIVERSAL FOREST PRODUCTS, INC. 63%
SWHC SMITH & WESSON HOLDING CORP 63%
SANM SANMINA CORP 61%
GWB GREAT WESTERN BANCORP INC 58%
HOMB HOME BANCSHARES INC 57%
AMSF AMERISAFE, INC. 55%
SAFM SANDERSON FARMS, INC. 53%
LPL LG DISPLAY CO LTD. (ADR) 51%
HII HUNTINGTON INGALLS INDUSTRIES INC 51%



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