Economy & Markets

The stock market bull continued its charge to record highs this week as the third quarter nears its end, despite September traditionally being its worst month. Corporate profits have benefited from tax cuts and consumer optimism. The Federal Reserve said household net worth rose by $2.2 trillion in the last quarter, driven by the stock market and rising real estate values.

So far it seems the market has either factored in or is ignoring the potential negative effects of trade tariffs on goods from China and elsewhere and interest rate hikes by the Fed that have propped up the dollar against other currencies.

Jobless claims are near their lowest since 1969 and manufacturing activity is on the rise. The U.S. economy is seen growing another 3% through December. All of these numbers soothe some of the worries over trade conflicts and slowing growth abroad and their effects on U.S. companies. The tax cuts have put wind in the sails of corporate America. Some estimate that companies will use the savings to buy back $1 trillion of their shares this year - adding fuel to the rally. Capital investments by big companies have risen 20% over last year.

On a fundamental and technical basis, the markets are strong. Corporate earnings continue to grow faster than expected against the backdrop of good news on the economy. Some analysts have warned investors not to be lulled into a false state of security. Shocks from emerging markets or unexpected news out of Washington could derail the momentum, at least temporarily. But traditional warning signs of trouble ahead are being underplayed. Short term rates are rising and could slip higher than longer-term rates, but that may not mean recession like it has in the past, some analysts say. And even if it does, the downturn won't be immediate.

Big companies have reclaimed their dominance in the last few weeks. The S&P 500 is up 9.6% this year and 7.8% this quarter, lifted by a doubling in the shares of Advanced Micro Devices, the index's biggest gainer in the quarter. Other stocks driving the index include Qualcomm, up 33% this quarter, HCA Healthcare, up 32% and United Continental, up 28%. The S&P sectors driving the gains this year continue to be consumer discretionary and technology, with the laggards being telecommunications and consumer staples.

The Dow Jones Industrial Average is up 7.8% this year and 9.8% this quarter. Its biggest gaining stocks since the end of June include Walgreens Boots Alliance, up 21%, Pfizer, up 20.8% and Apple, up 19.2%.

In contrast, while the small cap Russell 2000 is up 12% for the year, it lags the big cap indexes for the quarter, up just 4.6%. And the tech-heavy Nasdaq, which is up 16% for the year, is up 6.9% this quarter.

September is a time when money managers rebalance portfolios in preparation for the last few months of the year and the long winter ahead. The bull continues to rally, but eventually there will be a pullback. Trying to guess that inflection point is next to impossible with any accuracy over time. Preparing your mind to react calmly given how your portfolio is positioned is something you should be spending time thinking about. If you would like to take time to review your investment allocation with us, please feel free to get in touch and set up a time to speak with us over the next few weeks.

Some positive numbers :

1. The number of Americans filing for unemployment benefits fell unexpectedly, hitting a nearly 50-year low.

2. The record-low unemployment and strong consumer confidence should add up to a strong holiday season for retailers. Sales are expected to grow 5% to 5.6% from a year ago and several large retailers have announced plans to hire tens of thousands of seasonal employees.

Some not-so-positive numbers :

1. U.S. home sales flat lined in August after four straight months of declines and inventory increased for the first time in three years as the housing market continues to struggle. Mortgage applications also fell.

2. Producer prices unexpectedly fell in August, the first decline since February 2017.

3. The federal budget deficit doubled in August from a year ago because of a 30% increase in government spending, Treasury said.

Recommended Reading

Emerging market stocks reflect investor fears, according to a Bloomberg article by Nir Kaissar last month. A survey of 20 investors, traders and strategists resulted in a list of top worries, including central bank outlooks, trade conflicts, China, commodity prices and local politics. But investors believe U.S. companies are protected by strong fundamentals. Emerging market companies should feel better about that, Kaissar notes, because profits in developing countries "rival those in the U.S." Read more about the story here and check below for articles and blog posts you may have missed.

Passive Meltdown: The shift to passive investing means a lot of trading is no longer based on fundamental analysis and that could lead to a global market downturn, according to a recent story in the Financial Times. Read more

Bitcoin Dud: Mark Hulbert wrote in Barron's about a paper by University of Chicago economics professor Eric Budish. The paper argues that bitcoin won't play more than a bit role in the global monetary system. Read more

Bear Losses: John Hussman, who called the market collapses of 2000 and 2007-2008, says the end of the current economic cycle will result in market losses of approximately 64% for the S&P 500 and 69% for the Dow. Read more

Factor Focus: BAM Alliance research director Larry Swedroe wrote a recent ETF.com article looking at potential issues with research into factor investing. Enduring factors have to start with two critical criteria: It is a unique source of risk, and the return isn't explained by other well-documented factors. Read more

Fund Differences: Mutual fund managers who also run hedge funds don't do as well as their peers who stick to mutual funds, according to Barron's, which cited data for 600 funds from 2005 to 2011. Read more

Talent Contest: Hedge funds are using a competition to find new talent outside of traditional pools, as detailed in a story in Institutional Investor. Read more

Motley Advice: Consuelo Mack interviewed Motley Fool founders David and Tom Gardner to mark their firm's 25th anniversary and they offer a few pieces of advice to investors. Read more

Rebalance Benefit: The Economist recently wrote about the importance of asset allocation, but it isn't the mix of the portfolio that's important. It's sticking to whatever mix you choose and rebalancing your portfolio to make sure it stays in line. Read more

Bond Views: TCW Emerging Markets Income fund manager Penelope Foley told Barron's that even if rising rates pressure prices, bond yields for dollar-based debt average around 6%. The upshot, she says, "should be a total return of 4%-5%." Read more

Pension Outlook: California's teachers and public employee pension systems, the two biggest public pension funds in the U.S., are performing better this year but the performance is not likely to last, according to The Wall Street Journal. Both rolled back their investment targets this year in an effort to be more realistic. Read more

Hot List Performance Update

Since our last newsletter, the S&P 500 returned 1.8%, while the Hot List returned -0.3%. So far in 2015, the portfolio has returned -5.4% vs. 9.6% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 243.8% vs. the S&P's 193.0% gain.


The Fallen

As we rebalance the Validea Hot List, 4 stocks leave our portfolio. These include: Zagg Inc (ZAGG), Signet Jewelers Ltd. (SIG), Thor Industries, Inc. (THO) and Sanderson Farms, Inc. (SAFM).

The Keepers

6 stocks remain in the portfolio. They are: D. R. Horton Inc (DHI), Credit Acceptance Corp. (CACC), Patrick Industries, Inc. (PATK), Schnitzer Steel Industries, Inc. (SCHN), Universal Forest Products, Inc. (UFPI) and Universal Insurance Holdings, Inc. (UVE).

The New Additions

We are adding 4 stocks to the portfolio. These include: Magna International Inc. (Usa) (MGA), Aerovironment, Inc. (AVAV), Ulta Beauty Inc (ULTA) and Mcbc Holdings Inc (MCFT).

Latest Changes

Additions  
MAGNA INTERNATIONAL INC. (USA) MGA
AEROVIRONMENT, INC. AVAV
ULTA BEAUTY INC ULTA
MCBC HOLDINGS INC MCFT
Deletions  
ZAGG INC ZAGG
SIGNET JEWELERS LTD. SIG
THOR INDUSTRIES, INC. THO
SANDERSON FARMS, INC. SAFM

When the Other Side Gets it Right

It's fair to say that a lot of us have been taking sides lately, digging in with our world views and unable to see how those who think differently could justify their view. Polarization and extremes are the new normal.

But being able to see both sides is a crucial skill when it comes to picking stocks. That's because once an investor starts to like a company, the natural tendency is to drown out any negative information as irrelevant. An investor might be tempted to stick with a losing stock for longer than he or she should because of confirmation bias. They interpret information about the company in a way that justifies their ownership of the stock rather than taking a step back and looking at the situation objectively. They avoid seeking information that could contradict their thesis.

When it comes to the market, things are more them versus us than they have been in a long time. Long-suffering value investors have been waiting for the market to turn in their direction, unable to understand how growth stocks, particularly high-flying tech stocks, have commanded so much of the attention and the gains in the last couple of years. Growth stock investors, on the other hand, get confirmation of their view seemingly every time they tune in to see how the market is doing.

Over the decades, value stocks have outperformed, but you wouldn't know it judging by the last few years. And it is reasonable to assume the reversion to the mean is just around the corner. The historical evidence to support value is very compelling. But those of us who believe that are very likely to be subject to confirmation bias and just continue to read arguments in favor of value stocks over and over again. By doing that, we may miss something. That something is that there are some things that are different this time.

Sometimes patterns fall apart, and old assumptions stop working. Sometimes you have to adjust your thinking and be flexible. Something happened a decade ago that sent shockwaves through the market and financial system. U.S. banks nearly crumbled under the weight of a credit crisis not seen since the Great Depression of the 1930s. To fight it, the Federal Reserve injected an unprecedented amount of money into the banking system and the U.S. and the world went through a period of historically low rates while the banks and the markets nursed themselves to health. This action, called quantitative easing, calls us to reexamine some of our long-held assumptions. The result may be a reduced value premium and more extended periods of outperformance and underperformance for value going forward.

This also means the measurements we use to identify value stocks also have to change, or at least be open to review. The long running view of price to book, the most commonly used value metric, is not nearly as relevant as it used to be due to the rise of intangible assets, which are not reflected in book value. Those of us who believe in price to book would be doing ourselves a disservice if we didn't consider whether it still makes sense in the current market. Just blindly following it and expecting the past to repeat itself doesn't make any sense.

The belief that there is an absolute right answer and an absolute wrong one is fraught with problems, though. It leads to not even considering the opinions of others. It becomes the enemy of learning. And it leads to poor decision making

Investors tend to build a series of beliefs over time and then to seek confirming evidence of them. It becomes a viscous cycle where an investor reaches a conclusion and then selectively reads and listens to only those who back up that belief.

Market valuation is another area where people tend to draw lines in the sand. Some look at today's prices, reflecting strong corporate profits and a growing economy, and see more room to run. Others look at the current market, which just hit fresh highs, and say it's overvalued. Objectively, the market is clearly expensive right now relative to history. Some metrics make it look worse than others, but no matter what you look at, you will likely see at least an above average valuation.

That only captures part of the picture, though. Markets tend to stay overvalued for extended periods of time during bull markets. Trying to figure out when the music stops is next to impossible. Although valuations give you a picture of where markets are relative to history, they are a terrible timing tool. And we just had a tax cut that will boost earnings substantially this year. Investors who have made up their mind that the market is overvalued have likely been out of this market for a while now and missed substantial gains. They may very well miss further gains going forward. Those who were willing to look at both sides and challenge their belief that valuations can be used to time the market have likely had a much better outcome.

In the end, looking at the other side doesn't mean you have to change what you think. It doesn't mean you need to ignore the historical evidence that supports what you think. What it means is that confirmation bias can be the enemy of good decision making.

Focusing on information that contradicts your opinion rather than confirms it can help support better decision making. This may require you to talk to people whose opinion differs from yours and listen to their thinking rather than trying to argue your own side. It may require setting aside emotion and pride and looking at the information in front of you as detached as possible.

So next time someone disagrees with you, it may be better to look at it as a learning experience rather than discounting their opinion. It will likely make you a better decision maker and a better investor.

Newcomers to the Hot List

AeroVironment (AVAV) - The maker of small and tactical missile systems for the government scores highly on the model tracking the guru Peter Lynch and the small-cap growth investor.

Magna International Inc. (MGA) - This global automotive supplier scores highly on the models tracking gurus James O'Shaughnessy, Peter Lynch and Kenneth Fisher.

MCBC Holdings (MCFT) - This boat manufacturer scores highly on the model tracking the guru Joel Greenblatt as well as the model tracking momentum stocks.

Ulta Beauty Inc. (ULTA) - This cosmetics retailer scores highly on the models tracking Peter Lynch, Warren Buffett and Martin Zweig as well as the model tracking momentum stocks.

News on Hot List Stocks

Hanon Systems, a South Korean auto parts maker, said it will buy Magna's fluid pressure and controls group, including electronic pumps and cooling fans, for $1.23 billion.

Ulta Beauty board member Dennis Keith Eck sold 35,000 shares, or 9.3% of his stake in the retailer. Ulta recently announced an exclusive partnership with Kylie Cosmetics, the brand of Kardashian clan member Kylie Jenner.


Portfolio Holdings
Ticker Date Added Return
CACC 3/9/2018 30.7%
DHI 8/24/2018 -5.4%
AVAV 9/21/2018 TBD
UFPI 8/24/2018 -3.4%
ULTA 9/21/2018 TBD
SCHN 6/29/2018 -16.3%
MCFT 9/21/2018 TBD
PATK 8/24/2018 0.9%
MGA 9/21/2018 TBD
UVE 8/24/2018 2.6%


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

CACC   |   DHI   |   AVAV   |   UFPI   |   ULTA   |   SCHN   |   MCFT   |   PATK   |   MGA   |   UVE   |  

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 (13.36) 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 (0.44) 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 $1,182.2 million, needs to have a P/E below 40 to pass this criterion. CACC's P/E of (13.36) 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 (12.24%) 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 (6.42%) 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 (-43.36%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.

D. R. HORTON INC

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

D.R. Horton, Inc. is a homebuilding company. The Company constructed and sold homes in 27 states and 79 markets, as of September 30, 2015. The Company's segments include its 39 homebuilding divisions, its financial services operations and its other business activities. In the homebuilding segment, the Company builds and sells single-family detached homes and attached homes, such as town homes, duplexes, triplexes and condominiums. The Company's 39 homebuilding divisions are aggregated into six segments: East Region, South Central Region, Midwest Region, West Region, Southwest Region and Southeast Region. In the financial services segment, the Company sells mortgages and collects fees for title insurance agency and closing services. The Company has subsidiaries that conduct insurance-related operations; construct and own income-producing rental properties; own non-residential real estate, including ranch land and improvements, and own and operate oil and gas-related assets.


DETERMINE THE CLASSIFICATION:

DHI is considered a "True Stalwart", according to this methodology, as its earnings growth of 14.69% lies within a moderate 10%-19% range and its annual sales of $15,722 million are greater than the multi billion dollar level. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. DHI is attractive if DHI can hold its own during a recession.


INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for DHI was 68.61% last year, while for this year it is 65.55%. Since inventory to sales has decreased from last year by -3.05%, DHI passes this test.


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

The Yield-adjusted P/E/G ratio for DHI (0.72), based on the average of the 3, 4 and 5 year historical eps growth rates, is O.K.


EARNINGS PER SHARE: PASS

The EPS for a stalwart company must be positive. DHI's EPS ($3.70) would satisfy this criterion.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for DHI (35.98%) to be normal (equity is approximately twice debt).


FREE CASH FLOW: NEUTRAL

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for DHI (0.80%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for DHI (-9.57%) 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.

AEROVIRONMENT, INC.

Strategy: Growth Investor
Based on: Martin Zweig

AeroVironment, Inc. designs, develops, produces, supports and operates a portfolio of products and services for government agencies, businesses and consumers. The Company operates through the Unmanned Aircraft Systems (UAS) segment, which focuses primarily on the design, development, production, support and operation of UAS and tactical missile systems that provide situational awareness, multi-band communications, force protection and other mission effects. The Company supplies UAS, tactical missile systems and related services primarily to organizations within the United States Department of Defense (DoD). The Company's small UAS products include Raven, Wasp AE, Puma AE and Shrike. The Company also offers the Qube, an UAS for law enforcement, search and rescue and fire department personnel.


P/E RATIO: FAIL

The P/E of a company must be greater than 5 to eliminate weak companies, not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. AVAV's P/E is 50.99, based on trailing 12 month earnings, while the current market P/E is 27.00. Therefore, it fails 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. AVAV's revenue growth is 1.93%, while it's earnings growth rate is 47.18%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, AVAV 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 (127.1%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (0.1%) of the current year. Sales growth for the prior must be greater than the latter. For AVAV 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. AVAV's EPS ($0.85) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: FAIL

The EPS for the quarter one year ago must be positive. AVAV's EPS for this quarter last year ($-0.19) 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. AVAV's growth rate of 547.37% 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 AVAV is 23.59%. This should be less than the growth rates for the 3 previous quarters which are 261.11%, 200.00% and -38.46%. AVAV 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, 10.43%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 547.37%, (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, 547.37% must be greater than or equal to the historical growth which is 47.18%. AVAV 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. AVAV, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.60, 0.12, 0.66, 0.71, and 1.09, 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. AVAV's long-term growth rate of 47.18%, 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. AVAV's Debt/Equity (0.00%) is not considered high relative to its industry (584.26%) 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 AVAV, this criterion has not been met (insider sell transactions are 99, while insiders buying number 48). 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.

UNIVERSAL FOREST PRODUCTS, INC.

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

Universal Forest Products, Inc. is a holding company. The Company, through its subsidiaries, supplies wood, wood composite and other products to three primary markets, such as retail, construction and industrial. Its segments include North, South, West, Alternative Materials, International, idX Holdings, Inc. (idX) and Corporate divisions. idX is a designer, manufacturer and installer of in-store environments. It designs, manufactures and markets wood and wood-alternative products for national home centers and other retailers; structural lumber and other products for the manufactured housing industry; engineered wood components for residential and commercial construction; specialty wood packaging, components and packing materials for various industries, and customized interior fixtures used in a range of retail stores, commercial and other structures. Its customers comprising retail market are national home center retailers and retail-oriented regional lumberyards, among others.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (14.51) relative to the growth rate (33.48%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for UFPI (0.43) 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. UFPI, whose sales are $4,311.0 million, needs to have a P/E below 40 to pass this criterion. UFPI's P/E of (14.51) 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 UFPI was 12.26% last year, while for this year it is 11.68%. Since inventory to sales has decreased from last year by -0.58%, UFPI passes this test.


EPS GROWTH RATE: PASS

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for UFPI is 33.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for UFPI (30.06%) 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 UFPI (2.12%) 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 UFPI (-10.84%) 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.

ULTA BEAUTY INC

Strategy: Patient Investor
Based on: Warren Buffett

Ulta Beauty, Inc. is a holding company for the Ulta Beauty group of companies. The Company is a beauty retailer. The Company offers cosmetics, fragrance, skin, hair care products and salon services. The Company offers approximately 20,000 products from over 500 beauty brands across all categories, including the Company's own private label. The Company also offers a full-service salon in every store featuring hair, skin and brow services. The Company operates approximately 970 retail stores across over 48 states and the District of Columbia and also distributes its products through its Website, which includes a collection of tips, tutorials and social content. The Company offers makeup products, such as foundation, face powder, concealer, color correcting, face primer, blush, bronzer, contouring, highlighter, setting spray, shampoos, conditioners, hair styling products, hair styling tools and perfumes. The Company also offers makeup brushes and tools, and makeup bags and cases.

STAGE 1: "Is this a Buffett type company?"

A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage.


LOOK FOR EARNINGS PREDICTABILITY: PASS

Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.43, 0.66, 1.16, 1.90, 2.68, 3.15, 3.98, 4.98, 6.52, 9.58. Buffett would consider ULTA's earnings predictable. In fact EPS have increased every year. ULTA's long term historical EPS growth rate is 31.6%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 20.0% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers.


LOOK AT THE ABILITY TO PAY OFF DEBT PASS

Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. ULTA has no long term debt and therefore would pass this criterion.


LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: PASS

Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for ULTA, over the last ten years, is 20.4%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 10.1%, 13.2%, 17.3%, 20.2%, 21.8%, 20.2%, 20.5%, 21.9%, 26.1%, 32.8%, and the average ROE over the last 3 years is 27.0%, thus passing this criterion.


LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: FAIL

Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for ULTA, over the last ten years, is 20.1% and the average ROTC over the past 3 years is 27.0%, which is high enough to pass. It is not enough that the average be at least 12%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROTC must be at least 9% for Buffett to feel comfortable that the ROTC is consistent. The ROTC for the last 10 years, from earliest to latest, is 7.4%, 13.2%, 17.3%, 20.2%, 21.8%, 20.2%, 20.5%, 21.9%, 26.1%, 32.8%, thus failing this criterion.


LOOK AT CAPITAL EXPENDITURES: PASS

Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. ULTA's free cash flow per share of $5.46 is positive, indicating that the company is generating more cash that it is consuming. This is a favorable sign, and so the company passes this criterion.


LOOK AT MANAGEMENT'S USE OF RETAINED EARNINGS: PASS

Buffett likes to see if management has spent retained earnings in a way that benefits shareholders. To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $34.06 and compares it to the gain in EPS over the same period of $9.15. ULTA's management has proven it can earn shareholders a 26.9% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work.


HAS THE COMPANY BEEN BUYING BACK SHARES: BONUS PASS

Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. ULTA's shares outstanding have fallen over the past five years from 64,230,003 to 60,000,000, thus passing this criterion. This is a bonus criterion and will not adversely affect the ability of a stock to pass the strategy as a whole if it is failed.

The preceding concludes Buffett's qualitative analysis. If and when he gets positive responses to all the above criteria, he would then proceed with a price analysis. The price analysis will determine whether or not the stock should be bought. The following is how he would evaluate ULTA quantitatively.

STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return.


CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail]

Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $10.87 and divide it by the current market price of $284.76. An investor, purchasing ULTA, could expect to receive a 3.82% initial rate of return. Furthermore, he or she could expect the rate to increase 20.0% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing.


COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: PASS

Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 2.75%. Compare this with ULTA's initial yield of 3.82%, which will expand at an annual rate of 20.0%, based on the analysts' consensus estimated long term growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding.


CALCULATE THE FUTURE EPS: [No Pass/Fail]

ULTA currently has a book value of $30.26. It is safe to say that if ULTA can preserve its average rate of return on equity of 20.4% and continues to retain 98.17% of its earnings, it will be able to sustain an earnings growth rate of 20.0% and it will have a book value of $188.02 in ten years. If it can still earn 20.4% on equity in ten years, then expected EPS will be $38.39.


CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]

Now take the expected future EPS of $38.39 and multiply them by the lower of the 5 year average P/E ratio (31.6) or current P/E ratio (current P/E in this case), which is 26.2 and you get ULTA's projected future stock price of $1,005.36.


CALCULATE THE EXPECTED RATE OF RETURN BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]

Now add in the total expected dividend pool to be paid over the next ten years, which is $6.21. This gives you a total dollar amount of $1,011.57. These numbers indicate that one could expect to make a 13.5% average annual return on ULTA's stock at the present time. Although, the return is slightly below the liking of Buffett, the return would still be somewhat acceptable.


CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail]

If you take the EPS growth of 20.0%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $67.42. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (31.6) or current P/E ratio (current P/E in this case), which is 26.2. This equals the future stock price of $1,765.64. Add in the total expected dividend pool of $6.21 to get a total dollar amount of $1,771.85.


CALCULATE THE EXPECTED RETURN USING THE AVERAGE EPS GROWTH METHOD: [No Pass/Fail]

Now you can figure out your expected return based on a current price of $284.76 and the future expected stock price, including the dividend pool, of $1,771.85. If you were to invest in ULTA at this time, you could expect a 20.06% average annual return on your money. Buffett would consider this a great return.


LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: PASS

Based on the two different methods, you could expect an annual compounding rate of return somewhere between 13.5% and 20.1%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 16.8% on ULTA stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.

SCHNITZER STEEL INDUSTRIES, INC.

Strategy: Contrarian Investor
Based on: David Dreman

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.

MARKET CAP: FAIL

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. SCHN has a market cap of $760 million, therefore failing the test.


EARNINGS TREND: PASS

A company should show a rising trend in the reported earnings for the most recent quarters. SCHN's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.62, 1.31 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. SCHN passes this test as its EPS growth rate over the past 6 months (118.33%) has beaten that of the S&P (32.47%). SCHN's estimated EPS growth for the current year is (136.25%), which indicates the company is expected to experience positive earnings growth. As a result, SCHN passes this test.


This methodology would utilize four separate criteria to determine if SCHN 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: PASS

The P/E of a company should be in the bottom 20% of the overall market. SCHN's P/E of 7.52, based on trailing 12 month earnings, meets the bottom 20% criterion (below 11.89), and therefore passes this test.


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

The P/CF of a company should be in the bottom 20% of the overall market. SCHN's P/CF of 4.73 meets the bottom 20% criterion (below 6.81) and therefore passes 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. SCHN's P/B is currently 1.24, which does not meet the bottom 20% criterion (below 1.11), 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%). SCHN's P/D of 37.59 does not meet the bottom 20% criterion (below 19.72), 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.


CURRENT RATIO: PASS

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [2.34] or greater than 2). This is one identifier of financially strong companies, according to this methodology. SCHN's current ratio of 2.20 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 SCHN is 19.42%, while its historical payout ratio has been 77.16%. 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 18.38%, and would consider anything over 27% to be staggering. The ROE for SCHN of 19.16% is high enough to pass this criterion.


PRE-TAX PROFIT MARGINS: FAIL

This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. SCHN's pre-tax profit margin is 5.71%, thus failing this criterion.


YIELD: FAIL

The company in question should have a yield that is high and that can be maintained or increased. SCHN's current yield is 2.66%, while the market yield is 2.38%. SCHN fails this test.


LOOK AT THE TOTAL DEBT/EQUITY: PASS

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 58.98%. SCHN's Total Debt/Equity of 28.08% is considered acceptable.

MCBC HOLDINGS INC

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

MCBC Holdings, Inc. (MCBC) is a holding company. The Company is a designer and manufacturer of inboard tournament ski boats and V-drive runabouts under the MasterCraft brand. The Company operates through two segments: MasterCraft and Hydra-Sports. The MasterCraft product brand consists of recreational performance boats primarily used for water skiing, wakeboarding and wake surfing, and general recreational boating. The Company distributes the MasterCraft product brand through its dealer network. The Company manufactures a range of Hydra-Sports recreational fishing boats. It also leases a parts warehouse in the United Kingdom to expedite service, primarily to dealers and customers in the European Union. Its MasterCraft-branded portfolio includes Star Series, XSeries and NXT boats. In addition, MCBC offers various accessories, including trailers and aftermarket parts. The Company operates primarily through its subsidiaries, MasterCraft Boat Company, LLC and MCBC Hydra Boats, LLC.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (17.86) relative to the growth rate (47.61%), 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 MCFT (0.38) is very favorable.


SALES AND P/E RATIO: NEUTRAL

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. MCFT, whose sales are $332.7 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate.


INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for MCFT was 5.11% last year, while for this year it is 6.15%. 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 (1.04%) 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 MCFT is 47.6%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate.


TOTAL DEBT/EQUITY RATIO: FAIL

MCFT's Debt/Equity (143.09%) is above 80% and is considered very weak. Therefore, MCFT fails this test.


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 MCFT (6.34%) 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 MCFT (-8.80%) 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.

PATRICK INDUSTRIES, INC.

Strategy: Growth Investor
Based on: Martin Zweig

Patrick Industries, Inc. is a manufacturer of component products and distributor of building products and materials for the recreational vehicle (RV) and manufactured housing (MH) industrial markets for customers throughout the United States and Canada. In addition, it is a supplier to certain other industrial markets, such as kitchen cabinet, office and household furniture, fixtures and commercial furnishings, marine, and other industrial markets. The Company's segments include Manufacturing and Distribution. It manufactures a range of products, which include decorative vinyl and paper laminated panels, solid surface, granite and quartz countertops, fabricated aluminum products, wrapped vinyl, paper and hardwood profile mouldings, slide-out trim and fascia, cabinet doors and components, hardwood furniture, fiberglass and plastic component products including front and rear caps and marine helms, interior passage doors, RV painting, and slotwall panels and components, among others.


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. PATK's P/E is 15.25, 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. PATK's revenue growth is 29.71%, while it's earnings growth rate is 30.46%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, PATK 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 (48.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (59.8%) of the current year. Sales growth for the prior must be greater than the latter. For PATK 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. PATK's EPS ($1.42) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. PATK's EPS for this quarter last year ($0.85) 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. PATK's growth rate of 67.06% 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 PATK is 15.23%. This should be less than the growth rates for the 3 previous quarters, which are 35.85%, 34.38%, and 60.00%. PATK 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, 44.79%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 67.06%, (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, 67.06% must be greater than or equal to the historical growth which is 30.46%. PATK 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. PATK, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.99, 1.27, 1.82, 2.43 and 3.18, 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. PATK's long-term growth rate of 30.46%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.


TOTAL DEBT/EQUITY RATIO: FAIL

A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. PATK's Debt/Equity (144.33%) is considered high relative to its industry (87.01%) 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 PATK, this criterion has not been met (insider sell transactions are 244, while insiders buying number 103). 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.

MAGNA INTERNATIONAL INC. (USA)

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

Magna International Inc. (Magna) is a global automotive supplier. The Company's segments are North America, Europe, Asia, Rest of World, and Corporate and Other. The Company's product capabilities include producing body, chassis, exterior, seating, powertrain, electronic, active driver assistance, vision, closure, and roof systems and modules, as well as vehicle engineering and contract manufacturing. The Company has over 320 manufacturing operations and approximately 100 product development, engineering and sales centers in over 30 countries. It provides a range of body, chassis and engineering solutions to its original equipment manufacturer (OEM) customers. It has capabilities in powertrain design, development, testing and manufacturing. It offers bumper fascia systems, exterior trim and modular systems. It offers exterior and interior mirror systems. It offers sealing, trim, engineered glass and module systems. It offers softtops, retractable hardtops, modular tops and hardtops.


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. MGA's P/S of 0.48 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors.


TOTAL DEBT/EQUITY RATIO: PASS

Less debt equals less risk according to this methodology. MGA's Debt/Equity of 39.08% is acceptable, thus passing the test.


PRICE/RESEARCH RATIO: PASS

This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. MGA 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 MGA At this Point

Is MGA a "Super Stock"? NO


PRICE/SALES RATIO: PASS

The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.MGA's P/S ratio of 0.48 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors.


LONG-TERM EPS GROWTH RATE: FAIL

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. MGA's inflation adjusted EPS growth rate of 10.34% fails 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. MGA's free cash per share of 2.86 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. MGA, whose three year net profit margin averages 5.83%, passes this evaluation.

UNIVERSAL INSURANCE HOLDINGS, INC.

Strategy: Growth Investor
Based on: Martin Zweig

Universal Insurance Holdings, Inc. (UVE) is a private personal residential homeowners insurance company in Florida. The Company performs substantially all aspects of insurance underwriting, policy issuance, general administration, and claims processing and settlement internally. The Company's subsidiaries include Universal Property & Casualty Insurance Company (UPCIC) and American Platinum Property and Casualty Insurance Company (APPCIC). UPCIC writes homeowners insurance policies in states, including Alabama, Delaware, Florida, Georgia, Hawaii, Indiana, Maryland, Massachusetts, Michigan, Minnesota, North Carolina, Pennsylvania, South Carolina and Virginia. APPCIC writes homeowners and commercial residential insurance policies in Florida. The Company has developed a suite of applications that provide underwriting, policy and claim administration services, including billing, policy maintenance, inspections, refunds, commissions and data analysis.


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. UVE's P/E is 11.98, 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. UVE's revenue growth is 24.96%, while it's earnings growth rate is 22.50%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, UVE 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 (13.1%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (9.5%) of the current year. Sales growth for the prior must be greater than the latter. For UVE 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. UVE's EPS ($1.30) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. UVE's EPS for this quarter last year ($0.82) 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. UVE's growth rate of 58.54% 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 UVE is 11.25%. This should be less than the growth rates for the 3 previous quarters which are -62.67%, 213.16% and 30.23%. UVE 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, 30.15%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 58.54%, (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, 58.54% must be greater than or equal to the historical growth which is 22.50%. UVE 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. UVE, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.56, 2.08, 2.97, 2.79, and 3.15, 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. UVE's long-term growth rate of 22.50%, 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 UVE, this criterion has not been met (insider sell transactions are 219, while insiders buying number 77). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.


Watch List

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

Ticker Company Name Current
Score
THO THOR INDUSTRIES, INC. 54%
TJX TJX COMPANIES INC 50%
APPF APPFOLIO INC 49%
UTHR UNITED THERAPEUTICS CORPORATION 48%
EGBN EAGLE BANCORP, INC. 41%
HA HAWAIIAN HOLDINGS, INC. 41%
JHG JANUS HENDERSON GROUP PLC 41%
TOL TOLL BROTHERS INC 41%
ZAGG ZAGG INC 41%
CFG CITIZENS FINANCIAL GROUP INC 40%



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