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AVY

Basic Materials Sector - Attractive to Investor's

Sun, 08/16/2009 - 8:15pm
Category: Stock Insights
Related: ATI, AVY, BMS, DOW, FAST, FCX, GLW, PPG, SEE, X

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.

Potential Torpedoes

Mon, 12/01/2008 - 7:57pm
Category: Stock Insights
Related: AVY, CTXS, ED, FDX, FTR, KFT, NWL, PBI, PKI, SRE, SWK, T, TAP, VMC, VRSN, WIN

16 Potential Torpedoes - That Could Be Lurking In Your Portfolio

 

AFG’s screening criteria uses a set of proprietary variables that have consistently produced Buy and Sell recommendations that out and under perform their respective benchmarks.   A brief description of the variables and results are below:
Economic Margin - A corporate performance measurement that addresses the gaps in GAAP, eliminating distortions caused by accounting policies to measure what a company is truly earning above or below their cost of capital. 
Valuation Model – Using AFG’s modified discounted cash flow model to measure the intrinsic value of a firm compared to their peers. 
 Management Quality – Access management’s ability to make wealth creating decisions.
When looking for potential buy opportunities AFG looks for companies with attractive valuation upside, companies improving their economic profitability and companies with a management team following a wealth-creating strategy. The same is true when looking for potential torpedoes on the other end of the spectrum. AFG looks for those companies with the least valuation upside compared to their sector peers, below sector median expected EM change, and a management quality score that reflects a management team following a wealth destroying strategy.
When you compare the expectations of the strong sell list vs. the expectations of the strong buys you see a large spread between the medians. The 20 Strong-Buy company’s median sales growth expectations, were -9.01% Sales Growth priced in compared to 13.22% the median for the 16 Strong-Sell companies. Nearly a 20% spread in Sales Growth Expectations that are priced in.
These companies are potential torpedoes that could be lurking in your portfolio. They have all of the qualities that make up a bad investment and as a group, have much higher expectations priced in when compared to the group of 20 companies that met AFG’s Strong-Buy screen.
In the past AFG has consistently proven to identify companies that out-perform but just as importantly we have helped identify torpedoes and have helped our clients avoid these companies such as Tech stocks during the bubble. To get a better understanding of the importance of understanding the embedded expectations in a stock’s price refer to our Then and Now Study.
 
One example is Cisco before and after the Tech Bubble. Here is a chart that shows the expectations priced in for Cisco before and after the Tech Bubble burst.
 
 

 

AFG recommendations are ranked and have consistently identified winners and losers, therefore, this list of potential torpedoes should be given a second look if you own them or are considering adding them to your portfolio as they have characteristics that AFG has proven to be more likely to under-perform.

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