Starwood Property: Zweig-Style Buy

03/26/2015 7:00 am EST


John Reese

Founder and CEO, And Validea Capital Management

John Reese, editor of Validea, assesses stocks based on the investment strategies of numerous market legends; here, he looks at a stock that earns a high rating based on Martin Zweig, who he calls "one of the greatest growth investors of all-time.”

Starwood Property Trust (STWD) is a holding company focused on commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities, and other commercial real estate-related debt investments in both the US and Europe.

Based on the Zweig model, 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. Starwood's P/E is 10.70, based on trailing 12 month earnings, while the current market PE is 18.00. Therefore, it passes the first test.

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.

STWD's revenue growth is 140.85%, while its earnings growth rate is 17.14%, based on the average of the 3 and 4-year historical EPS growth rates using the current fiscal year EPS estimate. Therefore, STWD passes this criterion.

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. Starwood passes each of these earnings requirements.

This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles.

The four tests: the growth rate of the prior three quarter's earnings is less than the growth rate of the current quarter earnings; the EPS growth rate for the current quarter must be greater than or equal to the historical growth; a company's earnings must increase each year for a five year period.

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. STWD's long-term growth rate of 17.14%, based on the average of the 3 and 4-year historical EPS growth rates using the current fiscal year EPS estimate, passes this test.

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