ATI

A focus list of buys and sells for our readers to use as a starting point when looking to make changes to portfolio. This list contains attractive and unattractive stocks from every major sector excluding financials. AFG's buy and sell lists have proven through time to provide a significant spread between the buys and sells helping you to identify winners and avoid potential torpedoes.

The Applied Finance Group’s (AFG) Market Forecast Project is a monthly poll of professional investor’s designed to provide insights on how investor’s currently view the market and economy. This poll started out as an AFG client only poll at AFG’s annual research summit, but due to its popularity and successful predictions it has been expanded to all professional investors who register and participate and will be done monthly. The benefit of participation is being the first to receive the results before they are released on our blog or to anyone else. Earlier this month as a result of one of the poll’s questions that the Tech sector was the most attractive sector to invest in over the next 12 months, we released a list of Tech stocks that we like and a few that looked overvalued as well. In last month’s survey the Basic Material sector was the second most attractive place to invest due to the fact that many investors see an economic recovery ahead that may directly benefit many of the companies within the Materials sector when home building and new construction begin to correct and recover. Provided below is a list of Basic Material stocks that we find attractive and unattractive based on AFG’s default buy/sell criteria, valuation attractiveness and expected change in Economic Margins (AFG’s measure of corporate performance/profitability). Companies expected to improve Economic Margins greater than sector peers have proven through back-tests to be the most likely companies to outperform. Companies with attractive default valuations according to AFG have also consistently outperformed companies AFG views as overvalued.

 

Source (The Applied Finance Group)

*Valuation & EM Change are Ranks within their sector

AFG's Buy/Sell Criteria - factors in Economic Margin, Management Quality, and AFG's Valuation Metric. In order to determine Management Quality, AFG scores management on their growth decisions in accordance with the company’s ability to either create or destroy wealth. AFG's Valuation Metric measures a company's Percent to Target (the deviation between a stock's current trading price and its AFG current default target price). To derive the intrinsic value of a firm, AFG uses its proprietary Valuation Model.

If you are a professional investor and would like to be a part of our next survey click here.

Bloomberg provides a score for companies within the S&P 500 based on an average of all analyst ratings from the street. Below is a table highlighting companies with the best analyst ratings, largest increase in rating, highest price targets, and worst analyst ratings and the valuation attractiveness of each of these companies based on The Applied Finance Group’s (AFG) valuation model.

Companies within each of these groups are ranked from most attractive from a valuation perspective to the least attractive. VE.com will actively track the performance of these recommendations and see how they stack up to the analyst recommendations in each group. AFGview.com, AFG’s professional investor website allows you to compare any company using their rating versus the consensus ratings of the sell side. If you are interested in an analysis on a specific company, contact afgsales@afgltd.com.

 

Best/Worst Analyst Rated Companies (Bloomberg)

 

AFG's Valuation Model – Using AFG’s modified discounted cash flow model to measure the intrinsic value of a firm compared to its peers. AFG's Value Score - A score which represents the ranked percent to target (deviation between stock’s current trading price and AFG’s current default target price) or attractiveness (upside) relative to the universe. A Value Score of 100 is the most undervalued and 0 is the most overvalued company in the universe.

The companies on the top list are ten S&P 500 companies that have seen the best performance in the month of January over the past 5 years. Will these companies be able continue their hot streak in the month of January in 2009? Look for companies on the list that have low expectations for sales growth priced-in to justify their current stock price (VE Sales Growth) compared to what the firm has delivered in revenue growth over the last 5 years (5 Year Median Sales Growth). Companies with low expectations compared to what they have been able to deliver are the companies most likely to out-perform. Consistent returns in January coupled with low sales expectations are the companies you may want to look at as a possible investment.

The bottom list is the worst ten companies in median returns in the month of January over the past 5 years within the S&P 500. You may want to avoid the companies that have experienced tough times in January that also have high sales growth expectations compared to what they have been able to deliver the last 5 years.

 

S&P 500 Companies with the Best Returns in January – Last 5 Years

 

S&P 500 Companies with the Worst Returns in January - Last 5 Years

 

Economic Margin (EM) Defined - A measure of corporate performance that captures off balance sheet items, by looking at how much a company is earning above or below their cost of capital. EM is expressed in a % or margin. The Economic Margin Framework™ is more than just a performance metric as it encompasses a valuation system that explicitly addresses the four main drivers of enterprise value: profitability, competition, growth and cost of capital.

Here is a list of companies, two from each sector within the S&P 500 that are expected to improve their Economic Margins (EM) the most over the next two years along with the bottom two in each sector expected to have their EM’s deteriorate the most. Companies expected to improve their EM’s more than their sector peers have proven to be more likely to out-perform. Improving EM’s coupled with low expectations priced-in for sales growth are the companies on this list that may be worth a look as a potential investment.

Also included in this table is the implied sales growth priced-in over the next five years in order to justify the stock’s current trading price compared with their achieved 5 Year Median Sales Growth. Ask the question are the expectations for sales growth realistic compared with what revenue growth the firm has delivered in the last five years.

If you would like to learn more about the Economic Margin methodology or Value Expectations feel free to contact an AFG representative to schedule a web-demo at support@afgltd.com.

 

S&P 500 Companies with the Biggest Forecasted Change in Economic Margins