11 Undervalued Dividend Paying Stocks From the Russell 1000 – Including Corning Incorporated (NYSE:GLW) by Michael Ghioldi

With one half of 2016 in the books, one trend we have observed so far this year is that companies that pay a high dividend yield have driven the returns of the Russell 1000 index. When we separate the Russell 1000 into quintile buckets separated by dividend yield, the top quintile (Highest Dividend Yield) companies outperformed the bottom quintile (Lowest Dividend Yield) by over 12% so far in 2016. When you compare the performance of the Russell 1000 (RUI) vs. the SPDR High Dividend ETF (SDY) which tracks the performance of the 60 highest dividend yielding companies you can see the high yield companies have significantly outpaced the overall index by over 17% YTD.

Regardless of how you compare, it’s obvious that companies that pay a hefty dividend yield have done extremely well this year. To take advantage of the trend of success amongst the high dividend paying stocks we thought it would be good to provide a list of undervalued stocks from the Russell 1000 that also pay a reasonable dividend (above 2%).

While a steady stream of income may be the ultimate goal for some investors searching for dividend stocks, the companies on our list also look undervalued and meet AFG’s Investment Grade criteria. Companies that earn an Investment Grade of A tend to have valuation, momentum and quality characteristics inherent in companies likely to outperform sector and index peers.

This list can serve as a solid starting point for investors on the hunt for income in the large-cap space.

11 Undervalued Dividend Payers - Russell 1000

Alternative to this list of companies, The Applied Finance Group (AFG) puts together a focus list in the context of a portfolio that is centered on the concept of dividend paying companies that have attractive valuations.  AFG calls this focus list the AFG High Dividend Strategy (AFG HD).  The AFGHD is a low turnover portfolio that has exposure in each economic sector, holding anywhere from 25-35 securities.  This focus list marries the idea of high quality companies that pay a dividend but also have capital appreciation characteristics. For information on our High Dividend Strategy Portfolio or any of our other research products, email us at sales@afgltd.com.

20 Attractive Small Caps Including Planet Fitness Inc. (NYSE:PLNT) from the Russell 2000 (INDEXRUSSELL:RUT) by Michael Ghioldi

While most of the focus of our research is on Large Cap companies, typically in the S&P 500 or Russell 1000 indices, our research has a very good track record for identifying winners and losers in the small cap Russell 2000 index as well. In one of our posts from March of 2014 we recommended reducing exposure to small cap equities as they had reached bubble-level valuation ranges. Only twice in the previous 20 years had the Russell 2000 looked so overvalued. During our recommended moratorium on small caps (March 2014 to March 2016) the Russell 2000 index delivered -9.57% returns. Since then, the Russell 2000 finally has moved back into normal valuation territory and we issued an article on March 25, 2016 ending our market call of reducing exposure to small cap stocks. Small Caps have enjoyed a nice rally since, delivering over 7% returns since our call to get back into the small cap space.

Since the small caps have been performing so well of late and are still trading at a normal valuation level, we have decided to provide another list of attractive small-cap equities for those looking to add positions in the space. These companies all earn an Investment Grade of A and have attractive valuations. By using AFG’s Investment Grade, back-tests show that a strategy of buying A & B graded companies while avoiding D & F grade companies’ investors can put themselves in a better starting point to outperform. The companies below have been graded on Valuation, Quality and Momentum factors and all have several characteristics inherent in companies likely to outperform.

20 Attractive Small Cap Stocks - Russell 2000

Owens Corning (NYSE:OC): An Attractive Investment Opportunity by Michael Ghioldi

Below is a sample of one of the companies (Owens Corning NYSE:OC) that was in our latest Quarterly Focus List which highlights 5-7 buy ideas that we find compelling for the near term future. All of the companies released in this list have attractive valuations and a clearly identified short term catalyst for outperformance.

Overview: Owens Corning is a leading global producer of residential and commercial building materials, including glass fiber insulation, roofing shingles, glass-fiber reinforcements for products such as cars, boats, wind blades and smart phones; and engineered materials for composite systems. Founded in 1938, the company now operates in 26 countries with approximately 15,000 employees and generates annual revenues greater than $5 billion. OC emerged from bankruptcy in 2006 after filing for Chapter 11 in 2000 due to asbestos litigation. We like OC for the following reasons:

A Leader in All Three Operating Segments: OC runs well-managed businesses in markets that are growing modestly. 1) Roofing is a $10 billion market in the US and roofing components a $2 billion market. The company has a leading market position with less than 20% share. It operates a unique and strong distribution network, provides high quality differentiated products, as well as driving sustainable cost improvements through material science and vertical integration. 2) OC’s Insulation is benefiting from an improving housing market, and growing demand for energy-efficient products. Despite an uneven US housing recovery, the segment’s revenues have grown 8% CAGR since 2011 and its EBIT margin has improved from -8% to 8% in the same period. OC’s insulation business provides innovation, high quality, and great value, which allows its brand to enjoy 70% awareness among homeowners. 3) Composite Solution has been growing at the multiple of industrial production growth rates during the economic recovery, and returned to double EBIT margin and double Return on Capital after losing money in 2009. Top line growth is driven by demand, price increase, and mix improvement. YTD, segment revenue has grown 12% on a constant currency basis. Though currency is a headwind for nominal revenue growth, OC’s margin remains intact for Composite as the company manufactures in international regions.

Further Margin Expansion Potential: Poised to finish a strong 2015, management believes 2016 shares a lot of similarity with 2015 from the industry environment, growth potential and corporate execution’s perspectives. Management expects all three segments to deliver double digit EBIT margins in 2016, a milestone for the company. Specifically, stable pricing, promotion, and volume growth, as well as further asphalt deflation will further improve earnings in Roofing. Insulation will achieve full year double digit EBIT margin, driven by growth in new residential construction and improving pricing. Composites is entering a phase of tighter capacity utilization as demand grows at 1.6 times of the industrial production, which will be a key driver for margin improvement.

Strong Free Cash Flow Conversion and Growth Profile: The company expects 2015 earnings to free cash flow conversion rate of 100%, and the same conversion rate will continue to 2018. The strong FCF conversion rate is driven by low cash tax rate at 10-12% for the next two years, working capital progress, and expected CAPEX spend at just 100% of DD&A. Overall, improving housing and modest global growth will drive earnings and free cash flow growth for the foreseeable future.

To view the entire list of Quarterly Focus List ideas or to learn more about our research products email us at sales@afgltd.com.

Microsoft Corporation (NASDAQ:MSFT) & LinkedIn Corp (NYSE:LNKD) - Post Deal Value Expectations by Michael Ghioldi

We published an article to our clients earlier today breaking down Microsoft’s acquisition of LinkedIn to better understand the performance expectations that would be priced-in to the combined company to justify current trading levels. This explanation put together by Derek Bergen, The Applied Finance Group, LTD. provides insight into the potential value of the combined firm and whether or not Microsoft overpaid for LinkedIn.

Earlier this week, Microsoft announced plans to acquire LinkedIn in a $26.2 billion cash deal at a 50% premium above LNKD's market price at the time.  While it appears that there is an overwhelming consensus in the immediate reaction that Microsoft likely overpaid in this transaction, there is also a bullish perspective regarding the integration of LinkedIn’s network into both Office 365 and the CRM tool that Microsoft is developing as a relevant competitor to Salesforce.  While details on the specifics of the deal, as well as the potential value of the merged product offering between Office 365, Microsoft’s CRM platform, and LinkedIn, are emerging, we can use AFG’s Proforma Builder to attempt to evaluate the intrinsic value of the combined company through the performance expectations that justify current market value.

Example Articles:

Bear Perspective:

4 Reasons Microsoft Wasted $26.2 Billion To Buy LinkedIn, Peter Cohan, Forbes.com

Bull Perspective:

Satya Nadella explains in a sentence the real reason he bought LinkedIn ... and Salesforce should be worried, Julie Bort, Business Insider.com

Management Perspective:

Microsoft’s and LinkedIn’s vision for the opportunity ahead, Microsoft & LinkedIn Management

First, we can evaluate Microsoft on a stand-alone basis, based on analyst forecasts available before the deal was announced.  This stand-alone model will not include any adjustments to finance the all-cash deal, but we will address deal specifics later in our merged MSFT/LNKD model.

*AFG Proforma Builder, Value Expectations, 6/15/2016

*AFG Proforma Builder, Value Expectations, 6/15/2016

This scenario is based on roughly -2% sales growth in 2016, followed by inflationary growth through 2020.  EBITDA Margins have been trending downward, and levels around 36.5% reconcile consensus EPS in 2016, and we will assume that margins would continue to mildly decline to 36% by 2020.

Using the Export button on the Proforma Builder toolbar, we can create a separate worksheet of historical and forecast financials as we prepare to develop a model based on the merged company.

*AFG Proforma Builder, Export Data, 6/15/2016

*AFG Proforma Builder, Export Data, 6/15/2016

The worksheet above provides an example of the exported data for MSFT.  While this set of exported notes contains 16 spreadsheets with various sets of fundamental data and AFG model calculations, we will only need to focus on the Balance Sheet, Income Statement, and Supplementary Data for our project.  For the time being, we can set this workbook aside, and begin to develop a similar set of financial statement data for LinkedIn.

*AFG Proforma Builder, Value Expectations, 6/15/2016

*AFG Proforma Builder, Value Expectations, 6/15/2016

Similar to MSFT, I’ve used consensus data for 2016 and 2017, then simply scaled down growth by 300 basis points per year through 2020, while giving LNKD benefit of the doubt that margins would continue to expand significantly over 2015 levels.  This model is still lagging consensus EPS in 2017 by nearly $0.40/share, but still reflects significant growth and margin expansion with an eye on trying to maintain a conservative approach towards forecast assumptions.

We can then use the Export button to create a set of raw LNKD financial statement data.

*AFG Proforma Builder, Export Data, 6/15/2016

*AFG Proforma Builder, Export Data, 6/15/2016

We now have two sets of financial statement data for MSFT and LNKD.  In a new excel workbook, we can create a set of custom Balance Sheet, Income Statement and Supplementary Data that combines the two sets of historical financials into one consolidated workbook.  Note that MSFT has a June fiscal year end, while LNKD has a December fiscal year end, so this consolidation set of financials will be slightly mismatched.  The only significant change to either of these firms reported data since the end of their most recent fiscal year end is related to the debt that Microsoft has begun to accumulate over the last two quarters, and we will address this when we consider the financing aspects of this deal.  Otherwise, there are not any other material changes that could be problematic when consolidating each of the financial statements.

*AFG Research, Custom Consolidated Data, 6/15/2016

*AFG Research, Custom Consolidated Data, 6/15/2016

Notice in the example above that I simply added the various line items together.  This technique would apply to all line items on the Income Statement and Balance Sheet, as well as Normalized Rental Expense, Normalized R&D Expense, Depreciation Expense, Amortization Expense, Special Items, Common Dividends, and Preferred Dividends on the Supplemental Data worksheet.  We could also adjust the shares outstanding to attempt to reconcile the value of LinkedIn’s market cap as additional outstanding shares of Microsoft historically, which would be useful for advanced valuation adjustments by understanding model accuracy historically, but since this is an all-cash deal and advanced valuation themes are not a concern, we can skip more detailed work on the adjusted share count over time.

After opening a fresh copy of the default MSFT model in the Proforma Builder, we can use the Input Mode to insert our consolidated financial statement data.

*AFG Proforma Builder, Input Mode, 6/15/2016

*AFG Proforma Builder, Input Mode, 6/15/2016

Note that if you plan on replicating this process to analyze other M&A deals, make sure you set the Use Overrides field to “Yes” in the upper left corner of the spreadsheet.  We can then copy/paste our consolidated financials into the Overrides section in columns V through AG, then press calculate to makes sure that these overrides are incorporated into the editable model interface.  We can now further incorporate the details of the acquisition to ensure that any deployment of cash, addition of debt, or dilution of shareholders are properly incorporated.

Microsoft Announcement Notes, June 13, 2016 – Microsoft’s and LinkedIn’s vision for the opportunity ahead

Microsoft Announcement Notes, June 13, 2016 – Microsoft’s and LinkedIn’s vision for the opportunity ahead

*EquityInsights.com, Financials, 6/15/2016

*EquityInsights.com, Financials, 6/15/2016

From the two screenshots above, we can see that the LNKD in purchase is an all-cash deal, being funded through a new debt offering.  MSFT has taken on roughly $13B in new debt over the prior two quarters, so until additional information becomes available, we will assume that this will be used to finance part of the deal in our model.  Note that in Q2, current debt fell by nearly $7B as MSFT converted soon to mature bonds into longer duration instruments, so it’s possible that we could be understating the overall debt level by several billion dollars if our assumption is not accurate.

*AFG Proforma Builder, Balance Sheet, 6/15/2016

*AFG Proforma Builder, Balance Sheet, 6/15/2016

Based on the assumptions noted above, we will assume an additional 13-14 billion in new debt to finance the LNKD purchase.  A forecasted long-term debt level of $56B in total debt should satisfy this, but the total amount could be closer to $60B or $65B depending on how you interpret management’s implication of “Purchase price to be financed primarily with new debt” from their announcement and whether that includes recently issued debt or not.  In addition to this, we can increase Net Intangibles $19B to a total level of $43B in 2016, based on the $26B purchase price less $7B in total assets for LinkedIn.

*AFG Proforma Builder, Value Expectations, 6/15/2016

*AFG Proforma Builder, Value Expectations, 6/15/2016

Ignoring any assumed cost savings or new markets created by the combined company, MSFT appears to have an intrinsic value around $43 based on consensus estimates for both companies on a stand-alone basis driving our forecasts.

*AFG Proforma Builder, Value Expectations, 6/15/2016

*AFG Proforma Builder, Value Expectations, 6/15/2016

We can further model a scenario where we take management at their word on anticipated synergies, which they claim to be 150M by 2018, or a roughly 16 basis point improvement in EBITDA Margins.  In addition to this, the LNKD earnings per share impact for MSFT should be negligible, since LNKD consensus EPS estimates of $0.13 in 2016 and $0.79 and 2017 convert to $0.002/share in 2016 and $0.013/share in 2017 when adjusted for MSFT’s share count before adjusting for the offsetting impact of additional interest expense created from additional financing.

In order to appear fairly valued based on yesterday’s closing price, MSFT would need to deliver sales growth of 5%, while margins increase by 200 basis points over the next five years, which reflect roughly the same level of EBITDA Margin realized as recently as 2013.  Over the last five years, however, margins have declined from 43.0% down to 35.6% last year, so it appears that management has made a significant bet that the impact of LinkedIn’s product offerings can serve as a catalyst for additional sales growth and margin improvements across Office 365 and CRM customer bases. (The scope of this article is based on determining if MSFT is attractive at its current price based on implied expectations.  To further judge the management team based on the success of this acquisition, we could use the $51.48 closing price for MSFT on June 10 as our "fair value" for Microsoft.  To deliver intrinsic value in excess of the firm's share price before the deal was announced, MSFT would need to see margins further improve to 38.5% by 2020.)

Note that our Proforma forecasts above reflect performance that MSFT would need to deliver to be fairly-valued, so if your post deal expectations for MSFT are in excess of this, you could use this to help formulate an attractive investment thesis for Microsoft.  Alternatively, if these expectations seem a little aggressive, this analysis could also further support an unattractive thesis.  It’s important to note that Moody’s is reviewing the Issuer Rating for Microsoft, as well as its Senior Unsecured Rating in light of the announcement to take on $26B in new debt, which could further impact the cost of capital for the firm through increased interest expense.

Overall, forward-looking forecasts of the impact of this transaction on Microsoft's sales growth and margins are murky at best, but hopefully this article provides meaningful insight in the process that AFG can apply to determine a reasonable set of forecasts that should be placed on MSFT to justify their current stock price.  While new details emerge and yield clarity in performance expectations, we can continue to refine our forecasts to estimate a more precise intrinsic value for MSFT, but in the interim, we can use implied expectations to determine if performance implied is likely to be achievable.  In this case, it doesn't appear to require too drastic of a margin rebound or unrealistic sales growth assumptions to justify Microsoft's market value, but it will be interesting to see if management can now deliver or exceed this performance over the next five years.

Why we think Total System Services, Inc. (NYSE:TSS) is an attractive investment opportunity by Michael Ghioldi


Total System Services (TSS) provides electronic payment processing, merchant processing and associated services to financial and non-financial institutions globally. Electronic payment processing services are generated primarily from charges based on the number of accounts on file, transactions and authorizations processed, statements mailed, and other processing services for cardholder accounts on file. These services are provided to issuers of consumer credit, debit, retail and stored value cards as well as government services and commercial card accounts. As of October 2015, TSS had 685.5 million accounts on file in North America and 74.9 million accounts on file Internationally, making it one of the biggest 3rdparty processors in the market. TSS is the #1 North America third party processor, #1 China third party processor (through it joint venture with China UnionPay), #2 in Europe, and is the #2 Prepaid Card program manager in the US. The company provides services in 80 countries with over 2.7million point of sale locations utilizing its network.

TSS divides its services into four segments: North America Services (46% of 2015 YTD net revenue –US$847M), International Services (13% -US$244M), Merchant Services (19% -US$352M), and NetSpend (24% -US$436M). In terms of margins –North America segment is the most profitable (38.4% adjusted OM for 2015 YTD), with International lowest (15.9%) and the remaining segments in between –Merchant at 33.3% and NetSpend at 25%.

The North America and International Services segments are services that TSS provides to issuer banks (i.e. Bank of America when they a Visa credit card to a consumer). TSS provides services from processing the card application to initiating service for the cardholder, processing each card transaction for the issuing retailer or financial institution and accumulating the account’s transactions. TSS also provides optional fraud and portfolio management services. TSS will also mail cardholders their statements. It gets paid from the issuing bank/retailer on a long-term contract basis based on the number of accounts on file plus transaction processing fees (volume based) and non-volume based services (custom programming, value added products, etc.). During the first 9 months –52.1% of total North America revenues were volume based revenues and 47.9% from non-volume based revenues. In the International segment it was 36.7% and 63.3% respectively. Bank of America is a major client of TSS both in North America and Internationally-they executed a master services agreement in July 2012 with a minimum 6 yr. term –and was extended an additional 18 months in May 2015. TSS accounts for its China UnionPay joint venture and Mexico joint venture as an equity investment -it earned US$15M during the first 9 months, relatively a minor amount compared to its other segments.

Merchant Services provides services to acquiring banks (the banks where approved transaction funds are held) and merchants (i.e. the service to approve a credit card transaction for the merchant to obtain the funds from the acquiring banks). Majority of the revenues in the Merchant segment is driven by transactions and dollar volume processed –92.5% of segment revenues were volume based and 7.5% were value added services.

NetSpend manages and provides services for the issue of General Purpose Reloadable (GPR) debt and payroll cards and alternative financial service solutions to the underbanked and other consumers in the United States. TSS has relationships with 6 FDIC insured Issuing banks that handle the money –TSS handles the processing and other value added services that employers or users might want. TSS derived 69%from service fees charged to cardholders and 31% from interchange and other revenues. Service fees are based of active cards while interchange fees are based on dollar volume of transactions. 49% of the 3.1M active cards as of Sep 30 2015 are cards with direct deposits which usually incur more transactions –Number of cards grew by 18% in 2015 while gross dollar volume transacted for YTD 2015 grew by 19% to US$18.6B.



On January 26, 2016, the company announced the acquisition of TransFirst, a private company, for $2.35 Billion in cash and completed the acquisition on April 1st2016. TransFirst is a large merchant business that specializes in partner-centric distribution model that serviced 235,000 small & medium sized businesses. The combined entity of TSS & TransFirst will be the 6th largest merchant acquirer in the US based on revenue and 3rd largest integrated payment provider. The company will server over 645,000 merchant outlets with approximately $117 Billion in transaction volume.

The company’s Q4 earnings did not meet expectations as the company reported $0.57 per share profit, 0.03 less than what the market expected, though its revenue did beat expectations and its stock price declined 14% that day. The company’s stock price has come back to over the pre-earnings release price. The market will be eagerly waiting for TSS’s revised guidance when they release their earnings on April 26th, however as the acquisition closed after their quarter close, TransFirst will not be included in the GAAP Q1 results, but should be provided in Non-GAAP remarks.

Over the longer term –TSS benefits from the increased digitization and regulations of financial services. Payment processors such as TSS will benefit from this trend as cash will be a less viable option and consumers and merchants will need to use a form of electronic payment such as Visa, MasterCard, etc. Regulations will also lead to fewer potential competitors that have expertise and breadth to break into the processing segment. The digitization of financial services also benefits its NetSpend category as more consumers will need to have access to a cashless form of payment. TSS also benefits from the increased advertising by non-financial companies to use their payment solutions –i.e. Apple Pay, Google Pay and Samsung Pay.

With TransFirst acquisition closing after Q1, we have modeled 50% growth in 2016, 10% for 2017 and 5% thereafter given the factors mentioned above. We modeled flat margins of 25% (lower than historical TSS margins given TransFirst lower margins) though they could increase as TSS scales and many costs are fixed. TSS could be impacted negatively if the government lowers interchange fees or if it loses a big issuer bank such as Bank of America though no single customer is responsible for over 10% of its revenue.

10 Attractive Russell 1000 (INDEXRUSSELL:RUI) Stocks – Including McKesson Corp. (NYSE:MCK) by Michael Ghioldi

AFG’s Investment Grade™ model is designed to provide professional money managers a consistent and proven process for identifying undervalued securities and avoiding potential torpedo stocks while helping them navigate through constantly changing market environments. Simplified letter grades are attached to each company in our database based on rankings within a set of proven proprietary variables including Valuation, Momentum and Quality characteristics all of which are centered on AFG’s Economic Margin Framework.

The Economic Margin Framework is a performance metric that measures the amount a company earns above or below its true economic cost of capital. By correcting many of the distortions inherent in traditional accounting based valuation metrics and DCF models, our valuation process has an advantageous starting point when beginning to understand the value of the firm.

The Investment Grade model seeks to identify companies with the following characteristics;

Positive Economic Margin: Companies that earn above their economic cost of capital are profitable. Profitable firms that grow assets in order to maximize this profitability are more likely to create value for shareholders.

Trading at a discount: Our valuation metric, which is grounded in the Economic Margin framework has proven to correct many of the distortions inherent in traditional accounting approaches. This process has proven to attach meaningful and accurate valuations to companies and help investors outperform.

Positive Economic Margin & Price Momentum: Studies have shown that companies with positive price and earnings momentum tend to outperform. Our momentum variable that focuses on improving Economic Margins rather than EPS is a more dynamic approach to incorporating momentum into a valuation model and our backtests prove that it outperforms traditional EPS momentum.

Strong Earnings Quality: Companies that have a high level of accruals on their books (poor earnings quality) are more likely to encounter negative earnings surprises and underperform. By eliminating companies that have high levels of accruals investors can avoid companies that may not be able to sustain their current level of earnings and focus their attention on companies that provide more realistic projections of future earnings.

Sound Management Strategy: Companies that do not earn back their cost of capital should not be growing. Our Management Quality variable eliminates companies that follow a wealth destroying strategy of growing a business even when not earning a profit rather than first focusing on improving operations.

Why AFG Investment Grade?

All of the factors in this model have proven to add value as standalone screening variables, but are even more successful when used in concert. This dynamic multi-factor model makes slight adjustments to the weightings of each factor on a monthly basis to take full advantage of the variables adding the most alpha in the current market environment. This provides our clients a consistent approach to picking stocks that works well in any market environment. Below is a chart that illustrates the performance of Investment Grade A through F stocks within the Russell 1000 from 1998 to 2015. Our “A” Grade stocks have outperformed the “F” Grade stocks by over 10% over this time span and there is a monotonic relationship from A to F.

We believe that we have developed a more refined approach to picking stocks than traditional DCF approaches and Earnings based metrics. Investors who implement a long term investment strategy of buying “A” & “B” grade stocks and avoiding “D” & “F” grade stocks using AFG’s Investment Grade model are able to pick stocks in any market environment with a consistent approach that has proven to outperform. The stocks listed below all rate well within the model in Valuation, Quality and Momentum factors to be graded as “A” Investment Grade. This list can serve as a solid starting point when looking for new investment ideas in the Large-Cap space.

6 S&P 500 Companies Improving Economic Profitability – Including Ford Motor Company (NYSE:F) by Michael Ghioldi

AFG’s Economic Margin (EM) methodology is a cash flow based metric that measures the return a company earns above its true economic cost of capital. EMs provide a more complete view of a company’s underlying economic vitality than focusing on earnings based metrics as our framework takes into account Cost of Capital, Inflation and Cash Flow. This provides a much more accurate representation of management’s ability to create shareholder value and provides for better comparability across sectors and countries.

By utilizing the EM metric as the major momentum component in our Investment Grade model, we believe that we have a superior and more dynamic approach for incorporating momentum into a valuation model than traditional EPS momentum. The EM Momentum metric is designed to help identify firms that are improving their operations over the prior 3 months and have been rewarded in terms of analyst changes and higher forecasted EMs. Studies in the past have proven that firms that have positive earnings momentum tend to outperform, we believe focusing on EM Momentum adds even more alpha as a screening metric.

In the chart below you can see that when you split up the S&P 500 index into quintile buckets (A-F) based on EM Momentum, the top quintile (A) bucket outperforms the bottom quintile (F) bucket by over 18% over the past 5 years. EM Momentum has excellent performance as a stand-alone variable, but adds even more value when combined with AFG valuation screens.

Below we have provided a list of 5 companies from the S&P 500 that currently earn an EM Momentum grade of “A” meaning that they are in the top quintile of firms for improving operations over the prior 3 month period. These firms also currently earn an Investment Grade of A as well, which takes into account valuation, management quality, earnings quality and other factors along with EM Momentum.

S&P 500 - Top EM Momentum Companies