Related:
AVY,
CTXS,
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KFT,
NWL,
PBI,
PKI,
SRE,
SWK,
T,
TAP,
VMC,
VRSN,
WIN16 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.