Bank on Nara's Strong Performance

Last, Lynch's strategy employs return on assets (a year's earnings divided by total assets expressed as a percentage) as a way to measure a financial intermediary's profitability. Nara's ROA also gets a passing grade of 1.5%, which exceeds the minimum 1% required.

The Martin Zweig Strategy

Martin Zweig's strategy, as I interpret it, looks for a P/E greater than 5 to eliminate weak companies. But it also requires that the P/E be not more than three times the P/E of the current market -- as represented by the S&P 500 -- because such a situation is much too risky. Under Zweig's methodology, the P/E also should never be greater than 43. Nara's P/E is 15.4, based on trailing 12-month earnings, while the current market PE is 21.0. Therefore, it passes this test.

Earnings growth must be supported by a comparable or better rate of growth in sales, not just by cost-cutting or other nonsales measures. Nara's revenue growth is 19.6%, while its earnings growth rate is 21.5%, based on the average of the three-, four- and five-year historical EPS growth rates. Again, Nara earns a passing grade.

The Zweig strategy looks at earnings from different angles, which include requiring a current positive EPS and a positive EPS for the quarter one year ago. Nara has both. The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. Nara's growth rate was not only positive but an impressive 57.1%.

A stock should not be considered under the Zweig methodology if it posted one or more quarters of skimpy earnings, which I interpret as less than half the historical growth rate. Therefore, the final Zweig test relating to earnings trends compares the earnings growth rate of the prior three quarters with the long-term EPS growth rate. The growth rate in each of the prior three quarters should be better than half the long-term EPS growth rate. The growth rates for Nara's three previous quarters were 26.7%, 25.0% and 60.0%, while half the long-term EPS growth rate for Nara was 10.7%. Nara passes this last trend test; there have been no meager earnings quarters in the last year.

After considering earnings trend stability, the Zweig strategy focuses on earnings acceleration. This component of the methodology has two tests: