Markets & Economy

Strong corporate earnings aren't boosting U.S. stocks the way some had hoped, as fears that profit growth will slow start to creep into the market. Instead of buying the dip, as investors have over the last year of relative calm, people seem to be reacting by selling on the news. The Federal Reserve didn't raise rates this week, as expected, but didn't give any clear signal on its intentions for more hikes this year. Some market watchers are expecting two more increases, others see three in the offing. Uncertainty on rates and worries about possible trade wars and geopolitical tensions are keeping stocks from breaking out. The S&P 500 is down 1.8% this year through Thursday midday, and all but three sectors are down. As for those in positive territory, information technology leads, up 4.8% this year, followed by consumer discretionary, up 3.7%. The Dow Jones industrial average is down 3.5% for the year, with a 22% drop in shares of Procter & Gamble. The S&P trades around 19.99 trailing 12-months, while the Dow is at 18.5 times earnings.

Some positive numbers

  1. Home price increases are accelerating, according to CoreLogic, surging 7% in March compared to one year ago. Prices are higher than they were at the peak of the last housing boom.
  2. Small business employee wages rose an annualized 3.25% in April, the biggest gain in two years, according to Paychex.
  3. April job-cut announcements fell 43% from the previous month, according to a survey by Challenger. But so far this year, announced cuts are up 8% from the same period last year. Retail jobs are shrinking the most, followed by jobs in the health and consumer sectors.

Some not-so-positive numbers

  1. Factory activity slowed for a second straight month in April, and raw material costs are rising, according to the Institute for Supply Management's survey.
  2. The percentage of individual investors who described their short-term outlook for stocks as "neutral" is above 40% for the first time in almost two months. The latest AAII Sentiment Survey also shows a big drop in optimism and a rise in pessimism.
  3. Consumer prices rose in the year ending in March, getting close to the Federal Reserve's 2% target, according to the Commerce Department. That followed a 1.7% rise in February.
  4. The Federal Reserve on Wednesday said it kept short-term interest rates steady but indicated it was on track to raise them gradually in the coming months. The economy grew at a 2.3% annual rate in the first quarter, according to the Commerce Department, after 2.9% in the fourth quarter.

Recommended Reading

While Harvard alumni want the university to embrace passive investing, Yale's endowment is arguing in favor of active management. And the manager of the world's largest hedge fund says the risks of a global conflict, be it currency, trade or military, have increased. Here are some articles and blog posts in case you missed them.

Risk Yardstick The way professionals measure risk isn't always easily understood by the investing public. So, maybe there's a better way of explaining it. Validea's Jack Forehand has some ideas. Read more

Hidden Costs? The value investor David Winters has argued that index funds are more expensive than they seem, especially because managers are overpaid, based on shareholder votes about management pay. But WSJ's Jason Zweig refutes this idea. Read more

Myth Busting Sell in May is the motto, but it might apply better to stocks outside the U.S. Thirty years of data show American stocks have positive returns from May to mid-September while stocks in Asia and Europe don't. Read more

Laffner Q&A Barron's recently interviewed Arthur Laffner, the economist from the 1970s who advised Gerald Ford about the relationship between growth and taxes. Read more

Cash Wins What's the best way to win over investors during volatile markets? Cold hard cash. Buybacks and dividends are becoming increasingly important to investors, a recent story in WSJ said. Read more

Investor Calm Joel Greenblatt has come up with an idea to keep investors from bailing when things go wrong: He combines active and passive investing strategies. Read more

Yield Curve The difference between long and short term interest rates is narrowing, typically a sign of economic turmoil, but that's no reason to bail on stocks right now, Barron's says. Read more

Risks Rising Bridgewater's Ray Dalio has changed his mind. He sees an increased possibility that trade and other types of wars will disrupt the current environment, even if that possibility is still low. Read more

Active View Mario Gabelli, who describes himself as a bottom-up stock picker, isn't too worried about the trend toward passive investing. Read more

College Funds Yale's endowment disagrees with the idea that it and other institutions would be better off investing in index funds. It argues in favor of active management. Read more

Volatility Play Low volatility stocks are winning. They tend to beat the market over time, according to a recent article in Bloomberg. Read more

The Fallen

As we rebalance the Validea Hot List, 5 stocks leave our portfolio. These include: Toll Brothers Inc (TOL), Trinet Group Inc (TNET), Magna International Inc. (Usa) (MGA), Alliance Data Systems Corporation (ADS) and Stamps.com Inc. (STMP).

The Keepers

5 stocks remain in the portfolio. They are: Thor Industries, Inc. (THO), Credit Acceptance Corp. (CACC), Sanderson Farms, Inc. (SAFM), Five Below Inc (FIVE) and Autohome Inc (Adr) (ATHM).

The New Additions

We are adding 5 stocks to the portfolio. These include: Schnitzer Steel Industries, Inc. (SCHN), Bofi Holding, Inc. (BOFI), Seacoast Banking Corporation Of Florida (SBCF), Arista Networks Inc (ANET) and New Residential Investment Corp (NRZ).

Latest Changes

Additions  
SCHNITZER STEEL INDUSTRIES, INC. SCHN
BOFI HOLDING, INC. BOFI
SEACOAST BANKING CORPORATION OF FLORIDA SBCF
ARISTA NETWORKS INC ANET
NEW RESIDENTIAL INVESTMENT CORP NRZ
Deletions  
TOLL BROTHERS INC TOL
TRINET GROUP INC TNET
MAGNA INTERNATIONAL INC. (USA) MGA
ALLIANCE DATA SYSTEMS CORPORATION ADS
STAMPS.COM INC. STMP

What Gambling Can Teach Us About Process

Many of us fall back on superstition when we want a good outcome. On game day, an athlete will eat the same breakfast as any other game day, put on those "lucky" socks, and follow other routines to ensure a victory. Deviating from the ritual could mean defeat.

Gamblers often have a similar process. They will always pick their "lucky" number in red on the roulette wheel, for example. Or they will abandon the blackjack dealer who seems to have the hot hand. They will choose a slot machine based on the type of fruit on its spinning wheel or based on a hunch about how it "feels."

Sometimes the athlete and the gambler are successful, confirming these processes. It could be that such rituals are soothing and boost confidence, leading to a better athletic performance. A string of successful guesses by a gambler likewise boosts confidence that the secret decision-making process is working. They are likely to keep trying their luck.

But as we all know, lucky socks aren't going to stay that way long-term, and a hot hand is going to cool, eventually. Statistically speaking, gambling in a casino skews in favor of the house, no matter how lucky individuals appear to be at any given moment. A process based on lucky socks and hunches, not grounded in fundamental analysis and hard numbers, can't produce consistent wins over the long-term.

In his book Money Ball, the author Michael Lewis describes how the Oakland A's baseball team tried its hand at using statistical analysis to build a winning club. Rather than relying on the opinion of scouts who identified promising athletes based on speed and contact (RBIs and home runs), they started looking at on-paper metrics such as on-base percentage and slugging percentage, which they believed were better indicators of future success. And those attributes were less expensive to obtain. Eventually the A's were able to build a team that was able to keep up with the likes of the New York Yankees and their nine-digit payroll.

The A's didn't get immediate results, but they had a process that made sense and gave them an edge. While a gambler working on a hunch might have a burst of success, the A's using a systematic approach to analyzing talent were much more likely to be successful long-term.

One of the biggest mistakes investors make is valuing outcome over process, particularly giving significant weight to outcomes over short periods of time. When an investment manager does well over one, three, or five-year periods, investors flock to them and their assets under management rise. Most investors don't take the time to understand why managers achieved those results and whether that can be repeated in the future.

Jim O'Shaughnessy, the author of "What Works on Wall Street" and founder of his own asset management firm, boils successful investing down into a few rules. First, a full market cycle is more than five years. Second, between three and five years, the factors investors have to evaluate managers are being clouded by some signals and noise. And it gets worse the shorter the time frame. Shorter than one year, and an investor is getting all noise.

In other words, an addiction to short-term market news is like making decisions on noise alone.

Noise refers to data that is not predictive of the future. Signal refers to data that is. What O'Shaughnessy is saying is that performance over periods less than five years tell you very little about whether an investment strategy is going to work going forward. As performance periods get longer, the predictive power rises and the weight you can give to the outcome relative to the process rises as well, but process is always key regardless of time frame.

A good process should have a few important characteristics. First, historical data should be able to demonstrate that it works over long periods of time. Also, it should have a logic behind it that holds up to scrutiny, and the inputs should relate to the outputs. It's the difference between picking a winning racehorse based on the color and pattern of the jockey's silks, rather than the skill of the jockey and the abilities of the horse.

In addition, the manager should show discipline in following the process despite the inevitable ups and downs of the market. Strategies will go in and out of favor. And, perhaps the most important point, the process should demonstrate that it is repeatable.

In 20 years at Validea, we have been developing strategies based on the factors followed by investing greats like Warren Buffett, Benjamin Graham and Peter Lynch. These investing greats did the work in fundamental research that led them to success, and our computer-generated models track these same fundamental strategies.

The key to success is ignoring the latest fad or hot stock and finding a strategy that speaks to your goals and risk tolerance and then sticking with it. At any one time, it could be outperforming or underperforming, but the investors who understand the benefits of a process based not on hunches but on consistency and data will find success over the long-term.

Newcomers to the Hot List

Arista Networks Inc. (ANET)

This cloud networking solutions provider scores well on our models tracking the momentum strategy and the small-cap growth investor.

BOFI Holding Inc. (BOFI)

This financial services company scores well on the models tracking Peter Lynch and Martin Zweig as well as the momentum and small-cap growth models.

New Residential Investment Corp. (NRZ)

This real estate investment trust scores highly on the models tracking David Dreman and Peter Lynch as well as the momentum portfolio.

Schnitzer Steel Industries, Inc. (SCHN)

This recycler of scrap metal scores well on models tracking Kenneth Fisher, Peter Lynch and Benjamin Graham.

Seacoast Banking Corp. of Florida (SBCF)

This community banking company scores highly on the models tracking Martin Zweig and Peter Lynch as well as the momentum portfolio.

News on Hot List Stocks

Five Below is opening new retail stores in North Carolina, appealing to teens and pre-teens with cheap gadgets like the fidget spinner, candy and seasonal items.

BOFI Holding said third quarter fiscal earnings rose 25 percent to $51 million. Net interest income rose 31% to $116.7 million.

New Residential Investment had first quarter net income of $604 million, or $1.81 a share. Adjusted earnings were 58 cents a share, surpassing expectations.

Schnitzer Steel Industries declared a cash dividend of $0.1875 per common share payable on May 29.

Seacoast Banking Corp. said first quarter profit was $18 million, or 38 cents a share. Adjusted earnings were 40 cents a share, beating expectations.

Portfolio Holdings
Ticker Date Added Return
THO 4/6/2018 -8.4%
CACC 3/9/2018 -5.1%
ANET 5/4/2018 TBD
FIVE 4/6/2018 1.8%
SBCF 5/4/2018 TBD
BOFI 5/4/2018 TBD
SCHN 5/4/2018 TBD
NRZ 5/4/2018 TBD
ATHM 4/6/2018 6.3%
SAFM 4/6/2018 -0.9%


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

THO   |   CACC   |   ANET   |   FIVE   |   SBCF   |   BOFI   |   SCHN   |   NRZ   |   ATHM   |   SAFM   |  

THOR INDUSTRIES, INC.

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

Thor Industries, Inc. manufactures a range of recreational vehicles (RVs) in the United States and sells those vehicles primarily in the United States and Canada. The Company's segments include towable recreational vehicles, which consists of the operations of Airstream, Inc. (Airstream) (towable); Heartland Recreational Vehicles, LLC (Heartland) (including Bison Coach, LLC (Bison), Cruiser RV, LLC (CRV) and DRV, LLC (DRV)); Jayco, Corp. (Jayco) (including Jayco towable, Starcraft and Highland Ridge), Keystone RV Company (Keystone) (including CrossRoads and Dutchmen) and K.Z., Inc. (KZ) (including Livin' Lite RV, Inc. (Livin' Lite)); motorized recreational vehicles, which consists of the operations of Airstream (motorized), Jayco (including Jayco motorized and Entegra Coach) and Thor Motor Coach, Inc. (Thor Motor Coach), and Other, which includes the operations of its subsidiary, Postle Operating, LLC (Postle).


MARKET CAP: PASS

The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. THO, with a market cap of $5,554 million, passes this criterion.


EARNINGS PER SHARE PERSISTENCE: PASS

The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. THO, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 2.86, 3.29, 3.79, 4.91 and 7.09, passes this test.


PRICE/SALES RATIO: PASS

The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. THO's Price/Sales ratio of 0.68, based on trailing 12 month sales, passes this criterion.


RELATIVE STRENGTH: PASS

The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. THO, whose relative strength is 60, is in the top 50 and would pass this last criterion.

CREDIT ACCEPTANCE CORP.

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

Credit Acceptance Corporation offers financing programs that enable automobile dealers to sell vehicles to consumers. The Company's financing programs are offered through a network of automobile dealers. The Company has two Dealers financing programs: the Portfolio Program and the Purchase Program. Under the Portfolio Program, the Company advances money to dealers (Dealer Loan) in exchange for the right to service the underlying consumer loans. Under the Purchase Program, the Company buys the consumer loans from the dealers (Purchased Loan) and keeps the amounts collected from the consumer. Dealer Loans and Purchased Loans are collectively referred to as Loans. As of December 31, 2016, the Company's target market included approximately 60,000 independent and franchised automobile dealers in the United States. The Company has market area managers located throughout the United States that market its programs to dealers, enroll new dealers and support active dealers.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (10.54) relative to the growth rate (30.32%), 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 CACC (0.35) 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. CACC, whose sales are $1,142.8 million, needs to have a P/E below 40 to pass this criterion. CACC's P/E of (10.54) 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 CACC is 30.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

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


EQUITY/ASSETS RATIO: PASS

This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. CACC's Equity/Assets ratio (31.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion.


RETURN ON ASSETS: PASS

This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. CACC's ROA (11.83%) is above the minimum 1% that this methodology looks for, thus passing the criterion.


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 CACC (8.84%) 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 CACC (-56.13%) 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.

ARISTA NETWORKS INC

Strategy: Contrarian Investor
Based on: David Dreman

Arista Networks, Inc. is a supplier of cloud networking solutions that use software innovations to address the needs of Internet companies, cloud service providers and data centers for enterprise support. It develops, markets and sells cloud networking solutions, which consist of its Gigabit Ethernet switches and related software. The Company's cloud networking solutions consist of its Extensible Operating System (EOS), a set of network applications and its Ethernet switching and routing platforms. The programmability of EOS has allowed it to create a set of software applications that address the requirements of cloud networking, including workflow automation, network visibility and analytics, and has also allowed it to integrate with a range of third-party applications for virtualization, management, automation, orchestration and network services. EOS supports cloud and virtualization solutions, including VMware NSX, Microsoft System Center and other cloud management frameworks.

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. ANET has a market cap of $19,740 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. ANET's EPS for the past 2 quarters, (from earliest to most recent quarter) 1.68, 1.94 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. ANET passes this test as its EPS growth rate over the past 6 months (49.23%) has beaten that of the S&P (6.78%). ANET's estimated EPS growth for the current year is (15.33%), which indicates the company is expected to experience positive earnings growth. As a result, ANET passes this test.


This methodology would utilize four separate criteria to determine if ANET 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. ANET's P/E of 44.89, based on trailing 12 month earnings, is higher than the bottom 20% criterion (below 12.16), 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. ANET's P/CF of 39.83 does not meet the bottom 20% criterion (below 6.93), 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. ANET's P/B is currently 11.88, which does not meet the bottom 20% criterion (below 1.07), 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%). ANET's P/D is not available, and hence an opinion cannot be rendered at this time.


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 [1.93] or greater than 2). This is one identifier of financially strong companies, according to this methodology. ANET's current ratio of 4.28 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 ANET is 0.00%. Unfortunately, its historical payout ratio is not available. Nonetheless it passes the payout criterion, as this is a very low payout.


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 17.72%, and would consider anything over 27% to be staggering. The ROE for ANET of 34.24% 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. ANET's pre-tax profit margin is 28.84%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. ANET's current yield is not available (or one is not paid) at the present time, while the market yield is 2.61%. Hence, this criterion cannot be evaluated.


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 42.44%. ANET's Total Debt/Equity of 2.27% is considered acceptable.

FIVE BELOW INC

Strategy: Contrarian Investor
Based on: David Dreman

Five Below, Inc. is a specialty retailer offering a range of merchandise for teen and pre-teen customer. The Company offers an assortment of products, including select brands and licensed merchandise across a range of categories, including Style, Room, Sports, Tech, Crafts, Party, Candy and Now. Its product groups include leisure, fashion and home, and party and snack. Its Leisure includes items, such as sporting goods, games, toys, tech, books, electronic accessories, and arts and crafts. Its Fashion and home includes items, such as personal accessories, attitude t-shirts, beauty offerings, home goods and storage options. Its Party and snack includes items, such as party and seasonal goods, greeting cards, candy and other snacks, and beverages. The Company operated 522 locations across over 31 states throughout the Northeast, South and Midwest regions of the United States, as of January 29, 2017. Its typical store featured 4,000 stock-keeping units (SKUs), as of January 29, 2017.

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. FIVE has a market cap of $3,933 million, therefore passing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. FIVE's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.18, 1.20 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. FIVE passes this test as its EPS growth rate over the past 6 months (300.00%) has beaten that of the S&P (6.78%). FIVE's estimated EPS growth for the current year is (30.98%), which indicates the company is expected to experience positive earnings growth. As a result, FIVE passes this test.


This methodology would utilize four separate criteria to determine if FIVE 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. FIVE's P/E of 39.31, based on trailing 12 month earnings, is higher than the bottom 20% criterion (below 12.16), 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. FIVE's P/CF of 29.09 does not meet the bottom 20% criterion (below 6.93), 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. FIVE's P/B is currently 8.70, which does not meet the bottom 20% criterion (below 1.07), 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%). FIVE's P/D is not available, and hence an opinion cannot be rendered at this time.


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 [1.61] or greater than 2). This is one identifier of financially strong companies, according to this methodology. FIVE's current ratio of 2.92 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 FIVE is 0.00%. Unfortunately, its historical payout ratio is not available. Nonetheless it passes the payout criterion, as this is a very low payout.


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 17.72%, and would consider anything over 27% to be staggering. The ROE for FIVE of 25.81% 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. FIVE's pre-tax profit margin is 12.43%, thus passing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. FIVE's current yield is not available (or one is not paid) at the present time, while the market yield is 2.61%. Hence, this criterion cannot be evaluated.


LOOK AT THE TOTAL DEBT/EQUITY: PASS

The company must have a low debt to equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should be less than 20% or less than the industry average. FIVE's Total Debt/Equity of 0.00% is considered exceptional.

SEACOAST BANKING CORPORATION OF FLORIDA

Strategy: Growth Investor
Based on: Martin Zweig

Seacoast Banking Corporation of Florida is a bank holding company. The Company's principal subsidiary is Seacoast National Bank, a national banking association (the Bank). The Company and its subsidiaries offer an array of deposit accounts and retail banking services, engage in consumer and commercial lending and provide a range of trust and asset management services, as well as securities and annuity products to its customers. The Company, through its bank subsidiary, provides a range of community banking services to commercial, small business and retail customers, offering a range of transaction and savings deposit products, treasury management services, brokerage, and secured and unsecured loan products, including revolving credit facilities, letters of credit and similar financial guarantees, and asset based financing. The Bank also provides trust and investment management services to retirement plans, corporations and individuals.


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. SBCF's P/E is 20.12, based on trailing 12 month earnings, while the current market PE is 27.00. 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. SBCF's revenue growth is 30.77%, while it's earnings growth rate is 33.18%, based on the average of the 3 and 4 year historical eps growth rates. Therefore, SBCF passes this criterion.


SALES GROWTH RATE: PASS

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (36%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (34.4%) of the current year. Sales growth for the prior must be greater than the latter. For SBCF 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. SBCF's EPS ($0.38) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. SBCF's EPS for this quarter last year ($0.20) 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. SBCF's growth rate of 90.00% 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 SBCF is 16.59%. This should be less than the growth rates for the 3 previous quarters, which are 28.57%, 33.33%, and 64.29%. SBCF 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, 45.45%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 90.00%, (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, 90.00% must be greater than or equal to the historical growth which is 33.18%. SBCF 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. SBCF, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.44, 0.21, 0.66, 0.78, and 1.19, 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. SBCF's long-term growth rate of 33.18%, based on the average of the 3 and 4 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 SBCF, this criterion has not been met (insider sell transactions are 60, while insiders buying number 465). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.

BOFI HOLDING, INC.

Strategy: Growth Investor
Based on: Martin Zweig

BofI Holding, Inc. (BofI) is the holding company for BofI Federal Bank (the Bank). The Bank is a diversified financial services company. The Bank provides consumer and business banking products through its branchless, low-cost distribution channels and affinity partners. The Bank has deposit and loan customers, including consumer and business checking, savings and time deposit accounts and financing for single family and multifamily residential properties, small-to-medium size businesses in target sectors, and selected specialty finance receivables. The Bank distributes its deposit products through a range of retail distribution channels, and its deposits consist of demand, savings and time deposits accounts. Its mortgage-backed securities consist primarily of mortgage pass-through securities issued by government-sponsored entities and non-agency collateralized mortgage obligations and pass-through mortgage-backed securities issued by private sponsors.


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. BOFI's P/E is 16.75, based on trailing 12 month earnings, while the current market PE is 27.00. 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. BOFI's revenue growth is 29.27%, while it's earnings growth rate is 29.35%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, BOFI passes this criterion.


SALES GROWTH RATE: PASS

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (35.5%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (14.3%) of the current year. Sales growth for the prior must be greater than the latter. For BOFI 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. BOFI's EPS ($0.80) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. BOFI's EPS for this quarter last year ($0.63) 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. BOFI's growth rate of 26.98% 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 BOFI is 14.68%. This should be less than the growth rates for the 3 previous quarters which are 2.17%, 11.11% and 24.00%. BOFI 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, 12.77%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 26.98%, (versus the same quarter one year ago) then the stock passes.


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

The EPS growth rate for the current quarter, 26.98% must be greater than or equal to the historical growth which is 29.35%. Since this is not the case BOFI 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. BOFI, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.72, 0.96, 1.34, 1.85 and 2.07, 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. BOFI's long-term growth rate of 29.35%, 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 BOFI, this criterion has not been met (insider sell transactions are 237, while insiders buying number 215). 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.

SCHNITZER STEEL INDUSTRIES, INC.

Strategy: Growth Investor
Based on: Martin Zweig

Schnitzer Steel Industries, Inc. is a recycler of ferrous and nonferrous scrap metal, including end-of-life vehicles, and a manufacturer of finished steel products. The Company operates through two segments: the Auto and Metals Recycling (AMR) business and the Steel Manufacturing Business (SMB). The AMR segment collects and recycles auto bodies, rail cars, home appliances, industrial machinery, manufacturing scrap and construction and demolition scrap from bridges, buildings and other infrastructure. AMR's primary products include recycled ferrous and nonferrous scrap metal. The SMB segment produces finished steel products such as rebar, wire rod, coiled rebar, merchant bar and other specialty products using 100% recycled metal sourced from AMR. SMB's products are primarily used in nonresidential and infrastructure construction in North America. SMB operates a steel mini-mill in McMinnville, Oregon that produces finished steel products using recycled metal and other raw materials.


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. SCHN's P/E is 9.50, based on trailing 12 month earnings, while the current market PE is 27.00. 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. SCHN's revenue growth is -9.18%, while it's earnings growth rate is 39.97%, based on the average of the 3 and 5 year historical eps growth rates. Therefore, SCHN 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 (67.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (26.5%) of the current year. Sales growth for the prior must be greater than the latter. For SCHN 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. SCHN's EPS ($1.18) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: FAIL

The EPS for the quarter one year ago must be positive. SCHN's EPS for this quarter last year ($-0.05) fail 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. SCHN's growth rate of 2,460.00% 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 SCHN is 19.99%. This should be less than the growth rates for the 3 previous quarters which are 127.03%, 46.34% and 3.33%. SCHN 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, 444.68%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 2,460.00%, (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, 2,460.00% must be greater than or equal to the historical growth which is 39.97%. SCHN 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. SCHN, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were -10.40, 0.32, -7.03, -0.66, and 1.60, 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. SCHN's long-term growth rate of 39.97%, based on the average of the 3 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. SCHN's Debt/Equity (36.18%) is not considered high relative to its industry (61.90%) 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 SCHN, this criterion has not been met (insider sell transactions are 506, while insiders buying number 43). 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.

NEW RESIDENTIAL INVESTMENT CORP

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

New Residential Investment Corp. is a real estate investment trust (REIT). The Company focuses on investing in, and managing, investments related to residential real estate. The Company's segments include investments in excess mortgage servicing rights (Excess MSRs); investments in mortgage servicing rights (MSRs); investments in servicer advances; investments in real estate securities; investments in residential mortgage loans; investments in consumer loans, and corporate. Its portfolio includes mortgage servicing related assets, residential mortgage backed securities (RMBS), residential mortgage loans and other investments. The Company's servicing related assets include its investments in Excess MSRs, MSRs and servicer advances. The Company invests in agency RMBS and non-agency RMBS. The Company's other investments consist of consumer loans.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (3.97) relative to the growth rate (24.79%), 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 NRZ (0.16) 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. NRZ, whose sales are $2,687.7 million, needs to have a P/E below 40 to pass this criterion. NRZ's P/E of (3.97) 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 NRZ is 24.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

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


EQUITY/ASSETS RATIO: PASS

This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. NRZ's Equity/Assets ratio (26.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion.


RETURN ON ASSETS: PASS

This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. NRZ's ROA (7.05%) is above the minimum 1% that this methodology looks for, thus passing the criterion.


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 NRZ (8.10%) 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 NRZ (-113.82%) 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.

AUTOHOME INC (ADR)

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

Autohome Inc. is an online destination for automobile consumers in China. The Company is engaged in the provision of online advertising and dealer subscription services in the People's Republic of China (PRC). The Company, through its Websites, autohome.com.cn and che168.com, and mobile applications, delivers content to automobile buyers and owners. These services are offered to automakers and dealers, and advertising agencies that represent automakers and dealers in the automobile industry. The Company's autohome.com.cn targets automobile consumers with a focus on new automobiles. The Company's professionally produced content is created by editorial team and includes automobile-related articles and reviews, pricing trends in various local markets, and photos and video clips. Its database also includes new and used automobile listings and promotional information. Its dealer subscription services allow dealers to market their inventory and services through its Websites.


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. ATHM's profit margin of 32.12% 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. ATHM, with a relative strength of 97, 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 ATHM (120.45% for EPS, and 28.43% for Sales) are good enough to pass.


INSIDER HOLDINGS: PASS

ATHM's insiders should own at least 10% (they own 12.15% ) of the company's outstanding shares which is the minimum required. A high percentage typically indicates that the insiders are confident that the company will do well.


CASH FLOW FROM OPERATIONS: PASS

A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. ATHM's free cash flow of $3.15 per share passes this test.


PROFIT MARGIN CONSISTENCY: FAIL

The profit margin in the past must be consistently increasing. The profit margin of ATHM has been inconsistent in the past three years (Current year: 32.23%, Last year: 20.60%, Two years ago: 28.60%), which is unacceptable. This inconsistency will carryover directly to the company's bottom line, or earnings per share.


R&D AS A PERCENTAGE OF SALES: PASS

ATHM is either maintaining the same levels of R&D expenditures(currently $139.9 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

ATHM's level of cash $202.4 million passes this criteria. If a company is a cash generator, like ATHM, 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 ATHM was 1.60% last year, while for this year it is 0.00%. Since the inventory to sales is decreasing by -1.60% the stock passes this criterion.


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 ATHM was 20.23% last year, while for this year it is 30.49%. 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

ATHM'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 holding the shares when the company's Fool Ratio is greater than 0.65 (ATHM's is 0.82), but initial purchases in this range are unfavorable.

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

AVERAGE SHARES OUTSTANDING: FAIL

ATHM has either issued a significant amount of new shares over the past year or has been issuing more and more shares over the past five years. ATHM currently has 118.0 million shares outstanding. Neither of these are a good sign. Generally when a small-cap company issues more stock, the existing stock becomes devalued by the market, and hence diluted.


SALES: FAIL

Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. ATHM's sales of $977.7 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years.


DAILY DOLLAR VOLUME: FAIL

ATHM does not pass the Daily Dollar Volume (DDV of $77.7 million) test. It exceeds the maximum requirement of $25 million. Stocks that fail the test are too liquid for a small individual investor and many institutions have already discovered it.


PRICE: PASS

This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. ATHM with a price of $93.74 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.


INCOME TAX PERCENTAGE: FAIL

ATHM's income tax paid expressed as a percentage of pretax income either this year (11.81%) or last year (2.62%) is below 20% which is cause for concern. Because the tax rate is below 20% this could mean that the earnings that were reported are unrealistically inflated due to the lower level of income tax paid. However, we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%).

SANDERSON FARMS, INC.

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

Sanderson Farms, Inc. is a poultry processing company. The Company is engaged in the production, processing, marketing and distribution of fresh and frozen chicken, and also preparation, processing, marketing and distribution of processed and minimally prepared chicken. It sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, under the Sanderson Farms brand name to retailers, distributors, casual dining operators, customers reselling frozen chicken into export markets. The Company, through its subsidiaries, Sanderson Farms, Inc. (Production Division) and Sanderson Farms, Inc. (Processing Division), conducts its chicken operations. Sanderson Farms, Inc. (Production Division) is engaged in the production of chickens to the broiler-stage. Sanderson Farms, Inc. (Foods Division) is engaged in the processing, sale and distribution of chickens. The Company, through Sanderson Farms, Inc. (Foods Division), conducts its prepared chicken business.


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratio between .75 and 1.5 are good values. SAFM's P/S ratio of 0.76 based on trailing 12 month sales, falls within the "good values" range for non-cyclical companies and is considered attractive.


TOTAL DEBT/EQUITY RATIO: PASS

Less debt equals less risk according to this methodology. SAFM's Debt/Equity of 0.00% is exceptional, thus passing the test.


PRICE/RESEARCH RATIO: PASS

This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. SAFM is neither a Technology nor Medical company. Therefore the Price/Research ratio is not available and, hence, not much emphasis should be placed on this particular variable.


PRELIMINARY GRADE: Some Interest in SAFM At this Point

Is SAFM a "Super Stock"? NO


PRICE/SALES RATIO: FAIL

The prospective company should have a low Price/Sales ratio. To be considered a "Super Stock", non-cyclical (non-Smokestack) companies should have Price/Sales ratios below .75. However, SAFM, who has a P/S of 0.76, does not fall within the "Super Stock" range. It does fall between 0.75 and 1.5, which is considered the "good values" range for non-cyclical companies. Nonetheless, it does not pass this "Super Stock" criterion.


LONG-TERM EPS GROWTH RATE: PASS

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. SAFM's inflation adjusted EPS growth rate of 19.32% passes the test.


FREE CASH PER SHARE: PASS

This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. SAFM's free cash per share of 8.74 passes this criterion.


THREE YEAR AVERAGE NET PROFIT MARGIN: PASS

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. SAFM, whose three year net profit margin averages 7.59%, passes this evaluation.


Watch List

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

Ticker Company Name Current
Score
TOL TOLL BROTHERS INC 52%
MGA MAGNA INTERNATIONAL INC. (USA) 50%
LGIH LGI HOMES INC 50%
TNET TRINET GROUP INC 48%
CADE CADENCE BANCORP 46%
CVS CVS HEALTH CORP 44%
DHI D. R. HORTON INC 43%
ETFC E*TRADE FINANCIAL CORP 41%
MBUU MALIBU BOATS INC 41%
SKX SKECHERS USA INC 40%



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