20 Potential Torpedo Stocks to Avoid – Including J.C. Penney Company, Inc. (NYSE:JCP) by Michael Ghioldi

The main value-add that The Applied Finance Group (AFG) provides to subscribers of its research is valuation insights on over 4000 companies traded in the US. Our valuation model provides money managers a proven and repeatable process to identify mispriced equities in all spaces of the market regardless of market cap, sector or growth/value orientation.

Our model attempts to correct many of the shortfalls of traditional accounting approaches to valuing securities and cleans up many of the common distortions in “As Reported” financial statements. Our framework process begins by creating a set of economic financial statements that make for better comparisons between companies with vastly different characteristics and also sheds more light to the entire cash flow a company is generating. We believe this process puts us in a much better starting point when beginning to evaluate the attractiveness of an investment. The goal is to link a company’s true economic performance to value, and in turn link those values to decisions that benefit your portfolios.

One of the ways in which we discuss the valuation of a company is with a variable we have developed called Percent to Target. Percent to Target compares the intrinsic value of a company against its market traded price.  When stocks trade below their intrinsic value, it has Percent to Target that is positive; conversely, when a stock trades above its intrinsic value estimate, it has a negative Percent to Target. 

This variable has done an excellent job at adding alpha to picking stocks whether looking at it from a long term time horizon (1998 to present) or in the shorter term (YTD and 2 month returns). Not only does this variable play a vital role in our process by uncovering undervalued securities, this variable does an extremely good job of identifying potential torpedo stocks as evidenced in the charts below. These charts highlight the performance achieved by our Percent to Target variable within the Russell 1000 index. The entire index is broken down into quintile buckets, the “A” bucket contains the most undervalued stocks in the index while the “F” bucket contains the most overvalued stocks. An investor who purchased “A” stocks and avoided the bucket of “F” stocks would have saved a lot of headaches and enjoyed a solid spread in returns.

Being that this variable has done a good job of helping investors avoid potential torpedo stocks, we have provided a list of 20 companies that currently fall in the “F” quintile that we think should be avoided.

To learn more about how we help hundreds of institutional investors refine their investment process, email us at support@afgltd.com. Or sign up for our monthly newsletter which contains market commentary as well as investment ideas, click here to subscribe.

Why We Think Gilead Sciences, Inc. (NASDAQ:GILD) Is An Attractive Investment Opportunity by Michael Ghioldi

Last week we provided a list of attractive companies from the healthcare sector and how we view the healthcare space is one of the most attractive sectors within the S&P 500 based on several different points of view. Today we will highlight one of the companies from last week’s list to provide a bit more color as to why we like this particular company and also to provide a glimpse under the hood of our research platform. This will give our readers an idea of the first step a user of our research might see when using our Equity Insights™ research platform.

One of the ways we provide investors a quick outlook on the value of a company within our Equity Insights™ research platform is via The Company Profile page. This page gives investors a brief “snapshot” overview of how we view the attractiveness of a company as an investment opportunity and highlights the overall Investment Grade A to F. This page also highlights the individual grades that factor into the overall Investment Grade, default target price, corporate performance insights as well as traditional metrics (P/E etc.) and more.

You will see in the screenshot image below that we think Gilead Sciences, Inc. (NASDAQ:GILD is an attractive investment opportunity as we have given the company an Investment Grade of A. Along with the overall Investment Grade of A, the company also looks extremely undervalued and receives a valuation grade (Intrinsic Value) of A as well. The company carries a low level of accruals (good Earnings Quality) and is following a wealth-creating management strategy. Gilead Sciences has many of the characteristics of companies that have proven through rigorous back-testing to produce solid returns and outperform benchmarks as well as industry peers.

10 Attractive Investment Opportunities from the S&P 500 Healthcare Sector – Including Gilead Sciences, Inc. (NASDAQ:GILD) and Actavis plc (NYSE:ACT) by Michael Ghioldi

On a few occasions over the past few weeks we have dissected the S&P 500 by sector and discussed which sectors we believe look the most attractive. One sector that we believe looks very attractive, whether looking at it based on the revenue growth expectations priced into the current trading levels or the median valuation upside is the Healthcare sector.

According to The Applied Finance Group’s™ (AFG’s) valuation model the median company in the Healthcare sector has over 20% upside based on our target prices for every company in the sector. The median company in the sector has also delivered more revenue growth historically than the expectations for growth that are currently embedded in the trading levels of the median company in the sector. This means that the median company in the sector is likely to meet or exceed those expectations and deliver adequate returns to investors.

So far this year the sector has outpaced the S&P 500 index as a whole by over 290 basis points and based on our outlook for the sector we believe it is likely that the sector can continue to rally and outpace the overall index.

Utilizing AFG’s Investment Grade™ methodology we have identified 10 companies from the healthcare sector that we view as attractive investment opportunities. AFG’s Investment Grade metric takes into account valuation upside, management and earnings quality, as well as momentum in a weighted factor model. The model then assigns a letter grade from A to F (A’s being the most attractive investment opportunities). As the market environment changes, different weights are applied to each factor that goes into the overall grade. This ensures that our model is not overly affected by one economic factor and to also take advantage of the variables that have added the most alpha in the previous month. While there are shifts in the model’s weightings, valuation has historically always been a heavily-weighted factor due to its consistency in adding value in the process of identifying winners and avoiding torpedoes.

The chart below highlights ten companies from the healthcare sector of the S&P 500 index that receive an Investment Grade of A and look extremely attractive from a valuation perspective. This list of companies is a good starting point when looking for investment opportunities in the large-cap healthcare space.

Which S&P 500 Sectors Look Most Attractive? by Michael Ghioldi

Last week we discussed one way in which we look at the attractiveness of a company as an investment opportunity, by measuring the future sales growth (implied sales growth) a company must deliver to justify its current price relative to the revenue growth that the company has delivered historically. We use this to determine if the company has reasonable expectations and the likelihood the company will be able to meet those expectations in order to deliver a reasonable return for its investors.

When we compile this data and look at the median expectations of an entire sector or index, we can make some reasonable assumptions on the attractiveness of the index or sector as a whole. In our previous article we concluded that the S&P 500 index was slightly overvalued to fairly valued, yet plenty of attractive investment opportunities were available on an individual stock basis. Today we will analyze each sector (as defined by AFG) to determine which sectors have the lowest sales expectations relative to what they have delivered historically.

The chart below displays Implied Future Sales Growth and Historical Sales Growth for each AFG sector in the S&P500. The four sectors with the lowest delta between sales growth expectations and historical performance, or the four most undervalued sectors are listed on the left, and they are Technology, Transportation, Energy/Extraction and Healthcare.

When searching for investment opportunities or allocating across sectors, this data suggests that the four sectors with the lowest expectations relative to their historical track record should be the first place to look. We believe that these sectors are likely to meet the expectations embedded in their prices and there will be more investment opportunities for individual stocks.

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To learn more about how we help hundreds of institutional investors refine their investment process, email us at support@afgltd.com. Or sign up for our monthly newsletter which contains market commentary as well as investment ideas, click here to subscribe.

Attractive S&P 500 Companies With Over 50% Of Sales In Foreign Markets - Including Yum! Brands, Inc. (NYSE:YUM) and Pfizer Inc. (NYSE:PFE) by Michael Ghioldi

Two weeks ago we discussed the importance of diversification in an investor’s stock selection process and provided a list of attractive ADR’s to gain exposure to different countries/economies.

Another way to gain exposure to foreign markets outside of international Mutual Funds and ADR’s are domestically traded companies that do a significant amount of their business in foreign markets. Investing in companies that are traded here in the U.S. but derive much of their sales abroad allows an investor to capitalize on the higher growth rates available in developing economies without the added risks of trading in a foreign exchange that may not have the transparency, consistency or legal protection that is offered in U.S. exchanges. These companies give you the ability to diversify across several economies and avoid any major problems that may arise due to difficulties or stagnation in the U.S. markets.

The 12 companies listed below all have over 50% of their sales coming from outside of the United States and look attractively priced from a valuation standpoint. These firms also have an AFG Investment Grade™ of “A” or “B” which takes into account momentum and quality factors along with valuation. By adding high quality, well managed and attractively-priced businesses with high foreign exposure to your portfolio you can effectively diversify your investment portfolio across several economies.

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Are The S&P 500’s Current Growth Expectations Too Lofty or Easily Attainable by Michael Ghioldi

There are several ways that The Applied Finance Group tends to look at the overall attractiveness of the “market” (S&P 500 index for this discussion) which shape our views of how we communicate with our clients where investment opportunities are present and though infrequent, making a market call to get in or out of a certain segment of the market.

Along with aggregations of data that analyze the valuation attractiveness, market multiples such as Market Value/Invested Capital, and Economic Margins of an entire index, we also analyze imbedded sales growth expectations of companies in an index. We utilize the imbedded expectations to determine whether or not expectations for revenue growth for an individual company or an entire sector or index are likely to be met/exceeded or extremely lofty and unlikely to be reached based on the historical sales growth a company or group of companies has achieved historically.

We view the implied sales growth as the “hurdle rate” to get an idea of whether a company or index is able to deliver the growth necessary to provide an adequate return for its investors. When implied sales expectations are high (high hurdle rate) for a company or index, it becomes difficult to deliver the growth required for investors to obtain a satisfactory return on their investment.  On the contrary, when expectations are low (low hurdle rate) a company has a much easier time meeting the growth requirements to deliver adequate returns to its investors. 

The chart below displays the current and historical implied sales growth expectations (5 Year Median Implied Sales Growth) embedded in the market price for the S&P 500 index industrial firms (excludes Financials and Utilities). We compare those expectations to the sales growth these stocks have delivered over the past five years (5 Year Median Historical Sales Growth).

When analyzing this data one can think of the implied sales growth expectations as the over/under line on the future sales growth a company must deliver to justify its traded price. The main point to draw from this chart is simple – the market has priced the median S&P 500 industrial company to grow its sales at around 9% over the next five years, while over the past five years these companies have grown at just under 7%.  From this point of view it looks as though the S&P 500 industrial firms are currently fairly valued to slightly overvalued.

The index is currently within normal historical range (between +/- 1.5 std dev.) and we believe that attractive investment opportunities are plentiful within the S&P 500 index. In one of our next articles on www.AFGIndexes.com we will take this analysis one step further, to the sector level, to see which sectors within the index have the highest/lowest expectations priced in to their current price points.

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Leaders and Laggards of the S&P 500 in Q1 2014 – Including Actavis plc (NYSE:ACT) and Delta Air Lines, Inc. (NYSE:DAL) by Michael Ghioldi

With the first quarter of 2014 in the books, it is a good time to reflect on what has happened so far this year in the market. While the S&P 500 index has returned a modest gain of 1.3% during the first quarter, we want to highlight which companies were the biggest drivers as well as the biggest drags on the index so far this year.

The chart below shows the 20 biggest gainers of Q1 14 that have led the index in returns. These companies are all off to a good start, but which companies do we think can continue to deliver solid returns for the rest of 2014? And which do we think are most likely to run out of steam? We have highlighted two companies from this list that we believe still look attractive and have some more room to run. We have also highlighted two that we think will have the most trouble keeping this pace up for the rest of 2014.

The two companies we like the most going forward (highlighted in green) from the list of biggest gainers based on valuation upside and AFG Investment Grade™ are Delta Air Lines, Inc. (NYSE:DAL) and First Solar, Inc. (NASDAQ:FSLR). The two companies from this list that look the most overvalued (highlighted in red) and also have a poor Investment Grade are Frontier Communications Corp (NASDAQ:FTR) and Forest Laboratories, Inc.(NYSE:FRX).

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The next chart shows us the S&P 500’s biggest losers of the first quarter. We have also highlighted (in green) two companies that we like as investment opportunities that look most likely to turn things around. Based on valuation and AFG Investment Grade™, Celgene Corporation (NASDAQ:CELG) and Peabody Energy Corporation(NYSE:BTU) look attractive despite getting off to such a rocky start this year. Two companies that we think will continue to struggle (in red) as they have poor Investment Grades and look overvalued according to AFG’s valuation model are Cabot Oil & Gas Corporation (NYSE:COG) and Mattel, Inc.(NASDAQ:MAT).

To learn more about how we help hundreds of institutional investors refine their investment process, email us at support@afgltd.com. Or sign up for our monthly newsletter which contains market commentary as well as investment ideas, click here to subscribe.

Gaining Global Exposure Through These 20 Attractive ADR’s Including Diageo PLC (NYSE:DEO) and Vodafone (NYSE:VOD) by Michael Ghioldi

Whether it is allocating equity exposure across sectors, market capitalizations or countries, diversification is an important part of many investor’s stock selection process. One of the ways in which we help users of our research is by uncovering attractively priced equities using the same valuation process and metrics regardless of the company’s characteristics or country of origin. We believe that by using one consistent process and focusing on the entire cash flow a company generates to understand company value puts us in a better starting position to uncover attractively priced equities. Using The Applied Finance Group’s Investment Grade™ model we aim to create a set of economic financial statements for companies that work well across time, industries, sectors, market capitalizations, and regions. This process helps investors better understand the attractiveness of an investment by viewing a company’s financials through the same lens, regardless of whether you are looking at a U.S. consumer company or a Japanese Tech firm.

Investing in ADR’s allows investors the ability to diversify across multiple countries and economies and hedge against complete exposure to the dollar, without dealing with the fees and conversion hassles when purchasing shares on foreign exchanges. Other benefits of diversification via ADR’s include avoiding potential currency fluctuations or economic swings in one country, benefitting from comparative advantages in certain countries, be that labor, materials, growth opportunities, or just maintaining exposure to equities at times when the U.S. market is less attractive.

For the reasons listed above, we will provide a list of 20 attractive ADR’s based on AFG’s Investment Grade process which evaluates a company’s valuation attractiveness, management and earnings quality as well as momentum factors.  A letter grade of A-F is assigned to each stock, based on how attractive it is as an investment opportunity. This method has proven successful at identifying winners and helping avoid potential torpedo stocks for nearly 20 years. The 20 ADR’s listed below will help provide equity exposure to 15 different countries and 9 different sectors, however, the one thing they all have in common is an attractive AFG Investment Grade.

To learn more about how we help hundreds of institutional investors refine their investment process, email us at support@afgltd.com. Or sign up for our monthly newsletter which contains market commentary as well as investment ideas, click here to subscribe.