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.
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