Market & Economy - Mid-Year Update

As the second quarter draws to a close, the now greying bull market pushes forward. However, what in the beginning of the year was characterized as a "Trump Bump" is now operating against a different political backdrop. One that, in addition to causing uncertainty, is thwarting progress on the president's policy agenda. Healthcare is all but stymied, turning attention to tax reform, but increasingly heated controversy surrounding the president has put a fly in the ointment of policy progress.

The equity markets, however, remain ambivalent, rebounding from any intermittent dips they've seen in the first half of the year and bolstered by underlying fundamentals of a tight labor market, steady consumer confidence and marginal GDP growth. Along with the absence of significant inflation or deflation, we're seeing what many call a "Goldilocks" economy. The 4% growth envisioned by President Trump seems unlikely, and will probably settle nearer to 2%-3%.

Upbeat consumer confidence contrasts with tensions overseas. It remains to be seen whether tough trade talks between Trump and Chinese president Xi will reap rewards, and political tensions with North Korea have escalated. That said, the overseas markets have welcomed the French election victory of Emmanuel Macron (founder of the moderate En Marche! Party) and international growth continues in both developed and emerging markets. Many international markets are outdoing the U.S. this year after years and years of relative outperformance of American stocks.

Year-to-date, the S&P 500 has returned 9.0% (to 2438), the Dow is up by 8.6% (to 21,485) and the Nasdaq has returned 15.8% (to 6302), reflecting continued strength in a handful of large tech stocks. The biggest gains in the S&P 500 (YTD) came from the tech sector (19.83%), followed by healthcare (16.87%) and consumer discretionary (10.51%). Losers included energy (-14.31%) and telecommunications (-11.83%). The boost to small-caps ushered in by the new president have since dipped, with the class lagging large and mid-caps. Year-to-date, the Russell 2000, the leading small cap index, has returned 5.0% versus the around 10% for the Russell 1000 Index. Growth has outpaced value, with the Russell 1000 Growth index returning 14.4% compared to a paltry 3.7% for the Russell 1000 Value. Financials, which boast the lowest gains YTD (2.63%), have suffered the effects of the low interest rate and low volatility one-two punch.

The Fed has raised rates twice so far this year, by 25 basis points in both March and June--attributing the move to steady growth in the economy and labor market (core inflation is at just under 2%)--and another hike is expected before year-end. The market has absorbed these hikes easily. The European Central Bank continues to expand its balance sheet to support growth.

The housing market is seeing a tightening of inventory and an uptick in prices. In April, the home sales index (from the National Association of Realtors) suffered the first year-over-year decline since December of last year, which was the largest in nearly three years. In May, retail sales dipped by 0.3% compared to April but were up on a year-over-year basis by 3.8%. Privately-owned housing starts in May 2017 were down 5.5% (seasonally adjusted) compared to the revised April 2017 estimate.

Data from the Bureau of Economic Analysis shows that personal income rose by 0.4% in April, reflecting primarily an increase in private wages and salaries. Both real disposable personal income and personal consumption expenditures both rose by 0.4%. U.S. retail and food services sales for May, however, were down 0.3% from April. New orders for manufactured durable goods in May decreased by 1.1% (to $228.2 billion).

The Institute for Supply Management's manufacturing index inched up from April by 0.1% to 54.9% in May, indicating growth in manufacturing for the ninth consecutive month. While the index is down from 56.0% in January, the level is still indicative of general growth in the economy, just at a slower pace.

The market's volatility has been relatively muted recently, lower than it has been for years. This is primarily due to steady underlying economic fundamentals such as corporate profits and job growth. Add to the mix the heightened vigilance that emerged after the financial crisis in the form of risk-averse behavior by businesses and individual investors, and it's no surprise that market waters remain calm. It's important for investors to keep in mind, however, that the weather can shift quickly, so it's necessary to guard against complacency in managing investments. Diversification is especially important when things are quiet, in order to be prepared for the ups and downs that will undoubtedly emerge.

Performance Update

Since our last newsletter, the S&P 500 returned -0.5%, while the Hot List returned -0.0%. So far in 2016, the portfolio has returned 5.7% vs. 8.1% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 227.3% vs. the S&P's 141.9% gain.

The Fallen

As we rebalance the Validea Hot List, 4 stocks leave our portfolio. These include: Lemaitre Vascular Inc (LMAT), Willdan Group, Inc. (WLDN), Essent Group Ltd (ESNT) and Nutrisystem Inc. (NTRI).

The Keepers

6 stocks remain in the portfolio. They are: Magna International Inc. (Usa) (MGA), Sanderson Farms, Inc. (SAFM), Foot Locker, Inc. (FL), Argan, Inc. (AGX), Banco Macro Sa (Adr) (BMA) and Walker & Dunlop, Inc. (WD).

The New Additions

We are adding 4 stocks to the portfolio. These include: Credit Acceptance Corp. (CACC), Ameris Bancorp (ABCB), Evercore Partners Inc. (EVR) and Ipg Photonics Corporation (IPGP).

Latest Changes

Additions  
CREDIT ACCEPTANCE CORP. CACC
AMERIS BANCORP ABCB
EVERCORE PARTNERS INC. EVR
IPG PHOTONICS CORPORATION IPGP
Deletions  
LEMAITRE VASCULAR INC LMAT
WILLDAN GROUP, INC. WLDN
Essent Group Ltd ESNT
NUTRISYSTEM INC. NTRI

A Look at Validea's Portfolios

In looking across the portfolios on Validea.com, a few things emerge. The first, and as I noted above, is that value stocks and strategies are having a difficult year. Energy related names and retailers, many which trade at below market multiples, have trailed, and large cap technology names have led. As a result, many of the value models I run are trailing the market by wide margins. Of the five worst performer's year-to-date, five of them (models based on Greenblatt, Fisher, Neff, O'Shaughnessy and Graham) are pure value or have a deep value component. The contrarian models based on David Dreman, which is also a value model, has bucked the trend due to the revival of international names this year. The Dreman-inspired strategy routinely selects lots of non-U.S. companies via ADR holdings, and so far this year-- with International stocks performing well-- that has been a positive for this portfolio. The Buffett-based strategy is line-in with the market, a reflection of high quality names doing better than deep value stocks. At the very top of the list is the Momentum strategy, which is up 16.4% for the year. Technology related names, as you might expect, are the best performers in the model. The Validea Hot List, which is up 6% for year, is in the middle of the pack. The Hot List combines multiple strategies together, so typically it's not at the very bottom performance-wise when one type of strategy is struggling, and it's usually not the very best performer when most of our models are doing well. So far, 2017 is looking a lot like 2015, which was a difficult year for the majority of our stock selection models. However, it would be foolhardy to look at the last six months of performance and draw long-term conclusions from it.

The table below shows the monthly, 10-stock portfolio performance on a YTD basis through June 28th.

The following table shows the performance of each strategy since their inception

It's important to understand what drove performance and how it relates to a strategy's long-term record, but it's also important not to make decisions based on what's working (or not) working now. As we have done since 2003, we'll continue to run our portfolios with a focus on the long term and using the guru models in a disciplined and consistent way.

Newcomers to the Validea Hot List

Ameris Bancorp (ABCB): Ameris Bancorp is a financial holding company. The Company's business is conducted through its banking subsidiary, Ameris Bank (the Bank), which provides a range of banking services to its retail and commercial customers. It passes the tests of my strategies based on Peter Lynch and Martin Zweig. Full details

Credit Acceptance Corporation (CACC): 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. It passes the tests of my strategies based on Warren Buffett and Martin Zweig. Full details

Evercore Partners Inc. (EVR): Evercore Partners Inc. is an independent investment banking advisory company. It passes the tests of my strategies based on Peter Lynch and Martin Zweig. Full details

IPG Photonics Corporation (IPGP): IPG Photonics Corporation is a developer and manufacturer of a line of fiber lasers, fiber amplifiers, diode lasers, laser systems and optical accessories that are used for various applications. It passes the tests of my strategies based on Martin Zweig and Motley Fool. Full details

Portfolio Holdings
Ticker Date Added Return
BMA 7/1/2016 21.5%
WD 3/10/2017 20.6%
MGA 6/2/2017 -1.6%
AGX 5/5/2017 -12.7%
FL 4/7/2017 -32.6%
SAFM 11/18/2016 44.2%
CACC 6/30/2017 TBD
ABCB 6/30/2017 TBD
EVR 6/30/2017 TBD
IPGP 6/30/2017 TBD


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

BMA   |   WD   |   MGA   |   AGX   |   FL   |   SAFM   |   CACC   |   ABCB   |   EVR   |   IPGP   |  

BANCO MACRO SA (ADR)

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

Banco Macro SA is an Argnetina-based financial institution (the Bank) that offers traditional bank products and services to companies, including those operating in regional economies, as well as to individuals. In addition, the Bank performs certain transactions through its subsidiaries, including mainly Banco del Tucuman, Macro Bank Ltd, Macro Securities SA, Macro Fiducia SA and Macro Fondos SGFCI SA. It has approximately two categories of customers, such as retail customers, including individuals and entrepreneurs and corporate customers, which include small, medium and large companies and major corporations. In addition, it provides services to over four provincial governments. It provides its corporate customers with traditional banking products and services, such as deposits, lending (including overdraft facilities), check cashing advances and factoring, guaranteed loans and credit lines for financing foreign trade and cash management services.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (12.50) relative to the growth rate (41.33%), 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 BMA (0.30) is very favorable.


SALES AND P/E RATIO: PASS

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. BMA, whose sales are $1,827.9 million, needs to have a P/E below 40 to pass this criterion. BMA's P/E of (12.50) 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 BMA is 41.3%, 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: NEUTRAL

BMA 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. BMA's Equity/Assets ratio (14.00%) is very 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. BMA's ROA (4.88%) 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 BMA (13.00%) 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 BMA (-4.89%) 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.

WALKER & DUNLOP, INC.

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

Walker & Dunlop, Inc. is a holding company, which conducts its operations through Walker & Dunlop, LLC. The Company provides commercial real estate financial products and services primarily to developers and owners of multifamily properties. The Company originates, sells and services a range of multifamily and other commercial real estate financing products, including Multifamily Finance, Federal Housing Administration (FHA) Finance, Capital Markets, and Proprietary Capital. It originates and sells loans through the programs of the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac, and together with Fannie Mae, the government-sponsored enterprises (GSEs)), the Government National Mortgage Association (Ginnie Mae) and the Federal Housing Administration, a division of the United States Department of Housing and Urban Development (together with Ginnie Mae, HUD).


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (10.97) relative to the growth rate (30.36%), 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 WD (0.36) 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. WD, whose sales are $639.6 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.


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 WD is 30.4%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

WD 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. WD'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. WD's ROA (7.14%) is above the minimum 1% that this methodology looks for, thus passing the criterion.


FREE CASH FLOW: BONUS PASS

The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for WD (49.24%) is high enough to add to the attractiveness of the stock.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for WD (-92.01%) 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.

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 0.47 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 29.33% 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 0.47 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 8.77% 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 3.04 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 5.77%, passes this evaluation.

ARGAN, INC.

Strategy: Growth Investor
Based on: Martin Zweig

Argan, Inc. is a holding company. The Company conducts operations through its subsidiaries, Gemma Power Systems, LLC and affiliates (GPS), Atlantic Projects Company Limited (APC), Southern Maryland Cable, Inc. (SMC) and The Roberts Company (Roberts). Through GPS and APC, the Company's power industry services segment provides engineering, procurement, construction, commissioning, operations management, maintenance, development, technical and consulting services to the power generation and renewable energy markets. Through SMC, the telecommunications infrastructure services segment of the Company provides project management, construction, installation and maintenance services to commercial, local government and federal government customers. Through Roberts, the Company's industrial fabrication and field services segment produces, delivers and installs fabricated steel components specializing in pressure vessels and heat exchangers for industrial plants.


P/E RATIO: PASS

The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. AGX's P/E is 12.02, based on trailing 12 month earnings, while the current market PE is 19.00. 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. AGX's revenue growth is 34.86%, while it's earnings growth rate is 32.48%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, AGX 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 (76.8%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (77.6%) of the current year. Sales growth for the prior must be greater than the latter. For AGX 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. AGX's EPS ($1.31) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. AGX's EPS for this quarter last year ($0.81) 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. AGX's growth rate of 61.73% passes this test.


EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: PASS

Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for AGX is 16.24%. This should be less than the growth rates for the 3 previous quarters, which are 72.00%, 61.11%, and 182.22%. AGX 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, 93.75%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 61.73%, (versus the same quarter one year ago) then the stock fails, with one exception: if the growth rate in earnings between the current quarter and the same quarter one year ago is greater than 30%, then the stock would pass. The growth rate over this period for AGX is 61.7%, and it would therefore pass this test.


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

The EPS growth rate for the current quarter, 61.73% must be greater than or equal to the historical growth which is 32.48%. AGX 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. AGX, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.65, 2.78, 2.05, 2.42, and 4.50, 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. AGX's long-term growth rate of 32.48%, 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. AGX's Debt/Equity (0.00%) is not considered high relative to its industry (55.24%) 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 AGX, this criterion has not been met (insider sell transactions are 272, while insiders buying number 69). 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.

FOOT LOCKER, INC.

Strategy: Price/Sales Investor
Based on: Kenneth Fisher

Foot Locker, Inc. is a retailer of shoes and apparel. The Company operates through two segments: Athletic Stores and Direct-to-Customers. The Company is an athletic footwear and apparel retailer, which include businesses, such as include Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep and SIX:02. The Direct-to-Customers segment is multi-branded and sells directly to customers through Internet and mobile sites and catalogs. The Direct-to-Customers segment operates the Websites for eastbay.com, final-score.com, eastbayteamsales.com and sp24.com. Additionally, this segment includes the Websites, both desktop and mobile, aligned with the brand names of its store banners (footlocker.com, ladyfootlocker.com, six02.com kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu, runnerspoint.com and sidestep-shoes.com).


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. FL's P/S ratio of 0.82 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. FL's Debt/Equity of 4.50% 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. FL 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 FL At this Point

Is FL 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, FL, who has a P/S of 0.82, 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%. FL's inflation adjusted EPS growth rate of 17.52% 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. FL's free cash per share of 2.98 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. FL, whose three year net profit margin averages 7.71%, passes this evaluation.

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 0.88 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 0.88, 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 23.19% 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 2.21 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 7.80%, passes this evaluation.

CREDIT ACCEPTANCE CORP.

Strategy: Growth Investor
Based on: Martin Zweig

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.


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. CACC's P/E is 14.94, based on trailing 12 month earnings, while the current market PE is 19.00. 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. CACC's revenue growth is 12.55%, while it's earnings growth rate is 17.04%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, CACC fails this criterion.


SALES GROWTH RATE: FAIL

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (15.3%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (17.6%) of the current year. Sales growth for the prior must be greater than the latter. For CACC 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. CACC's EPS ($4.72) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. CACC's EPS for this quarter last year ($3.63) 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. CACC's growth rate of 30.03% 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 CACC is 8.52%. This should be less than the growth rates for the 3 previous quarters, which are 17.51%, 19.26%, and 13.16%. CACC 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, 16.56%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 30.03%, (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, 30.03% must be greater than or equal to the historical growth which is 17.04%. CACC 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. CACC, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 8.58, 10.54, 11.92, 14.28 and 16.31, 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. CACC's long-term growth rate of 17.04%, 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 CACC, this criterion has not been met (insider sell transactions are 535, while insiders buying number 71). 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.

AMERIS BANCORP

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

Ameris Bancorp is a financial holding company. The Company's business is conducted through its banking subsidiary, Ameris Bank (the Bank), which provides a range of banking services to its retail and commercial customers. The Company operates through four segments: the Banking Division, the Retail Mortgage Division, the Warehouse Lending Division and the SBA Division. The Banking Division is engaged in the delivery of financial services, which include commercial loans, consumer loans and deposit accounts. The Retail Mortgage Division is engaged in the origination, sales and servicing of one- to four-family residential mortgage loans. The Warehouse Lending Division is engaged in the origination and servicing of warehouse lines to other businesses that are secured by underlying one- to four-family residential mortgage loans. The SBA Division is engaged in the origination, sales and servicing of small business administration (SBA) loans.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (21.35) relative to the growth rate (36.05%), 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 ABCB (0.59) makes it 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. ABCB, whose sales are $251.6 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.


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 ABCB is 36.1%, 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: NEUTRAL

ABCB 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. ABCB's Equity/Assets ratio (11.00%) is 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. ABCB's ROA (1.23%) 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 ABCB (-5.27%) 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 ABCB (-1.88%) 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.

EVERCORE PARTNERS INC.

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

Evercore Partners Inc. is an independent investment banking advisory company. The Company operates through two business segments: Investment Banking and Investment Management. The Company's Investment Banking segment includes its Advisory services, through which Evercore provides advice to clients on mergers, acquisitions, divestitures and other strategic corporate transactions, with a particular focus on advising multinational corporations and private equity firms on various transactions. Its Investment Management segment focuses on Institutional Asset Management, through which Evercore manages financial assets for institutional investors and provide independent fiduciary services to corporate employee benefit plans; Wealth Management, through which it provides wealth management services for high-net-worth individuals, and Private Equity, through which it manages private equity funds. Private Equity holds interests in entities that manage middle-market private equity funds in Mexico.


DETERMINE THE CLASSIFICATION:

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


P/E/GROWTH RATIO: PASS

The investor should examine the P/E (17.33) relative to the growth rate (31.52%), 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 EVR (0.55) makes it favorable.


SALES AND P/E RATIO: PASS

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. EVR, whose sales are $1,588.4 million, needs to have a P/E below 40 to pass this criterion. EVR's P/E of (17.33) 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 EVR is 31.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.


TOTAL DEBT/EQUITY RATIO: NEUTRAL

EVR 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. EVR's Equity/Assets ratio (39.00%) 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. EVR's ROA (17.33%) 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 EVR (11.07%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.


NET CASH POSITION: NEUTRAL

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for EVR (14.11%) 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.

IPG PHOTONICS CORPORATION

Strategy: Growth Investor
Based on: Martin Zweig

IPG Photonics Corporation is a developer and manufacturer of a line of fiber lasers, fiber amplifiers, diode lasers, laser systems and optical accessories that are used for various applications. The Company offers a line of lasers and amplifiers, which are used in materials processing, communications and medical applications. The Company sells its products globally to original equipment manufacturers (OEMs), system integrators and end users. The Company's manufacturing facilities are located in the United States, Germany and Russia. The Company offers laser-based systems for certain markets and applications. Its products are designed to be used as general-purpose energy or light sources. Its product line includes High-Power Ytterbium CW (1,000-100,000 Watts), Mid-Power Ytterbium CW (100-999 Watts), Pulsed Ytterbium (0.1 to 200 Watts), Pulsed and CW, Quasi-CW Ytterbium (100-4,500 Watts), Erbium Amplifiers and Transceivers.


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. IPGP's P/E is 27.16, based on trailing 12 month earnings, while the current market PE is 19.00. 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. IPGP's revenue growth is 15.83%, while it's earnings growth rate is 15.70%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, IPGP 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 (37.9%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (25.3%) of the current year. Sales growth for the prior must be greater than the latter. For IPGP 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. IPGP's EPS ($1.38) pass this test.


QUARTERLY EARNINGS ONE YEAR AGO: PASS

The EPS for the quarter one year ago must be positive. IPGP's EPS for this quarter last year ($0.92) 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. IPGP's growth rate of 50.00% 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 IPGP is 7.85%. This should be less than the growth rates for the 3 previous quarters, which are 8.70%, 9.32%, and 23.01%. IPGP 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, 13.58%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 50.00%, (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, 50.00% must be greater than or equal to the historical growth which is 15.70%. IPGP 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. IPGP, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.82, 2.97, 3.80, 4.53 and 4.85, 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. IPGP's long-term growth rate of 15.70%, 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. IPGP's Debt/Equity (2.40%) is not considered high relative to its industry (55.78%) 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 IPGP, this criterion has not been met (insider sell transactions are 567, while insiders buying number 262). 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
ESNT ESSENT GROUP LTD 56%
ATH ATHENE HOLDING LTD 51%
LMAT LEMAITRE VASCULAR INC 50%
MAN MANPOWERGROUP INC. 47%
TX TERNIUM SA (ADR) 47%
KORS MICHAEL KORS HOLDINGS LTD 44%
VALE VALE SA (ADR) 42%
CTB COOPER TIRE & RUBBER CO 40%
LAD LITHIA MOTORS INC 39%
PAYC PAYCOM SOFTWARE INC 39%



Disclaimer

The names of individuals (i.e., the 'gurus') appearing in this report are for identification purposes of his methodology only, as derived by Validea.com from published sources, and are not intended to suggest or imply any affiliation with or endorsement or even agreement with this report personally by such gurus, or any knowledge or approval by such persons of the content of this report. All trademarks, service marks and tradenames appearing in this report are the property of their respective owners, and are likewise used for identification purposes only.

Validea is not registered as a securities broker-dealer or investment advisor either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. Validea is not responsible for trades executed by users of this site based on the information included herein. The information presented on this website does not represent a recommendation to buy or sell stocks or any financial instrument nor is it intended as an endorsement of any security or investment. The information on this website is generic by nature and is not personalized to the specific situation of any individual. The user therefore bears complete responsibility for their own investment research and should seek the advice of a qualified investment professional prior to making any investment decisions.

Performance results are based on model portfolios and do not reflect actual trading. Actual performance will vary based on a variety of factors, including market conditions and trading costs. Past performance is not necessarily indicative of future results. Individual stocks mentioned throughout this web site may be holdings in the managed portfolios of Validea Capital Management, a separate asset management firm founded by Validea.com founder John Reese. Validea Capital Management, which is a separate legal entity and an SEC registered investment advisory firm, uses, in part, the strategies on the web site to select stocks for its clients.