AZO

The chart below contains 10 of the cheapest stocks in the S&P 500 based on AFG’s valuation metric which has proven through vigorous back-testing to identify companies that are more likely to outperform than their sector peers. AFG’s valuation techniques also help investors identify and take advantage of mispriced securities in the market. One way investors can identify over or undervalued stocks is by using AFG’s Intrinsic Value Chart, which displays a company’s intrinsic value relative to its trading range and helps entry/exit points. Below is an example of Apollo Group (NASDAQ:APOL) one of the companies from our list of the 10 cheapest S&P 500 companies using AFG’s Intrinsic Value Chart to illustrate how well we have tracked the company as well as a visual representation of the company’s trading range relative to its default intrinsic value.

To identify potentially attractive investment ideas, The Applied Finance Group (AFG) usually uses a combination of proprietary variables to develop a focused group of potential buy ideas that meet criteria based on valuation, economic performance, management quality, and earnings quality. Although this set of investment criteria has proven successful in generating buy ideas, AFG’s valuation on a standalone basis has consistently been able to identify mispriced securities and investment opportunities that outperform their chosen benchmark. Several times over the last year ValueExpectations.com has released lists of companies narrowed only by the valuation properties of the company using AFG’s Value Score. In the near future we will highlight all of the “valuation-only screen” company lists released on VE since November 2008 and see how much value our valuation variable creates in the screening process. Listed below are the top 10 companies in the S&P 500 (INDEXSP:.INX) (excluding Financials) based on AFG Value Score alone. These companies look the most attractive from a valuation perspective relative to the rest of the S&P 500 index.

In yesterday’s article on ValueExpectations.com we discussed the solid month of February for the retail segment as most retailers posted better-than-expected same store sales growth. The question we posed was whether or not this was sustainable growth, or just a small temporary boost caused by easy comparisons and tax refunds. The conclusion that we come to is that it is not the time to rush out and buy retail companies but to proceed with caution as the “easy money has likely been made in the retail sector.” However if you are an investor that is actively pursuing positions from within the retail industry, we have provided a few retail names that look attractive (6) and unattractive (6) based on criteria that The Applied Finance Group uses in its stock selection process.

On March 9th 2009, the S&P 500 hit its low mark of the year of 666.79. Since March the market has rallied up to 1,068.78 as of the close on September 16, 2009 and we thought it timely to analyze the companies that have made the biggest gains and losses since the low and provide some insights on how we view the 10 biggest gainers and losers in the index going forward. All of the biggest movers have been ranked based on attractiveness according to The Applied Finance Group’s (AFG’s) investment criteria and valuation model. The companies with the most attractive valuations and positive Economic Margin (AFG’s measure of corporate performance) movement have proven to be more likely to outperform those companies that look unattractive according to AFG investment criteria and that look expensive within AFG’s valuation model.

The list below contains the companies that have experienced the biggest price movements in the S&P 500 since the March 9th low and how each of these companies measure up going forward, according to AFG’s investment criteria and valuation model. Companies that look attractive according to AFG’s valuation model along with improving Economic Margins have proven through vigorous back-tests to identify the company’s most likely to outperform their benchmark.

AFG Investment Opportunity Rank within Sector % Move Since March 9th Low Ticker Name Sector Valuation Signal EM Change Signal S&P 500 Biggest Gainers Since March 9th Low (ex. Financials) (NYSE:TXT)  TEXTRON INC Capital Goods Unattractive Unattractive Negative 416% (NASDAQ:WYNN)  WYNN RESORTS LTD Consumer Services Unattractive Unattractive Negative 366% (NYSE:GCI) GANNETT CO INC Consumer Services Unattractive Unattractive Negative 365% (NYSE:ODP) OFFICE DEPOT INC Consumer Services Fair Unattractive Positive 969% (NYSE:GT)  GOODYEAR TIRE & RUBBER Consumer Durable Fair Unattractive Positive 342% (NYSE:F) FORD MOTOR CO Consumer Durable Fair Unattractive Positive 314% (NYSE:THC)  TENET HEALTHCARE CORP Health Fair Unattractive Fair 538% (NYSE:IP) INTERNATIONAL PAPER CO Basic Material Fair Unattractive Fair 467% (NYSE:WYN) WYNDHAM WORLDWIDE CORP Consumer Services Fair Fair Negative 422% (NYSE:DOW) DOW CHEMICAL CO THE Basic Material Fair Attractive Positive 308% S&P 500 Biggest Losers Since March 9th Low (ex. Financials) (NYSE:FDO)  FAMILY DOLLAR STORES INC Consumer Services Attractive Attractive Positive -12% (NASDAQ:CEPH) CEPHALON INC Health Attractive Attractive Positive -6% (NYSE:ABT) ABBOTT LABORATORIES Health Attractive Attractive Positive 1% (NYSE:DF) DEAN FOODS Consumer Non Durable Fair Attractive Positive -5% (NYSE:AZO)  AUTOZONE INC Consumer Services Fair Attractive Positive -2% (NYSE:PCS) METROPCS COMMUNICATIONS Technology Fair Attractive Fair -34% (NYSE:CAH) CARDINAL HEALTH INC Health Fair Attractive Negative -8% (NYSE:SUN)  SUNOCO INC Energy and Extraction Fair Attractive Negative 1% (NYSE:HES)  HESS CORP Energy and Extraction Fair Attractive Negative 1% (NYSE:HRB)  H&R BLOCK INC Consumer Services Fair Fair Positive -2%

 

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In recent weeks we have written several blogs (S&P 500 sector stock watch, Attractive stocks under $35, with potential investment opportunities, Solid S&P Value Companies, Cheapest Stocks In the S&P 500), discussing investment opportunities within the S&P 500. These stocks ideas all had favorable scores under The Applied Finance Group's (AFG’s) investment criteria, which includes economic performance, valuation, earnings quality and management’s ability to create shareholder wealth, among other criteria.

Another way that AFG identifies potentially attractive investments is through the use of its Value Expectations interface, which helps investors get a better understanding of the expectations embedded into stock prices. This interface allows us to understand the Sales Growth, EBITDA Margin, and Asset Turnover a company has to deliver in the future to justify its current trading price. In theory and in normal circumstances, if the imbedded future performance is very conservative relative to the company’s historical performance, the stock is regarded as undervalued. The table below displays the implied future Sales Growth (“Priced-in Sales Growth) of the companies we have recently recommended in our recent blogs, assuming their EBITDA Margins and Asset Turnovers stay at 5-year median levels.

Company Descriptors Sales Growth   Ebitda   Asset Turnover Exchange/Ticker Name Sector "Priced-in" Sales Growth 5 Year Median LFY   5 Year Median LFY   5 Year Median LFY (NYSE:ABT) ABBOTT LABORATORIES Health 6.32% 13.51% 13.94%   25.34% 24.83%   0.69 0.70 (NYSE:AEP)  AMERICAN ELECTRIC POWER Utilities 9.53% 4.22% 7.92%   27.14% 28.82%   0.33 0.32 (NYSE:AES)  AES CORP THE Utilities -4.73% 12.73% 18.27%   34.66% 29.23%   0.39 0.46 (NASDAQ:APOL) APOLLO GROUP INC CL A Miscellaneous -2.48% 15.31% 15.31%   28.46% 25.59%   1.71 1.69 (NYSE:AZO) AUTOZONE INC Consumer Services -8.92% 3.72% 5.72%   19.59% 19.72%   1.33 1.24 (NYSE:BIG)  BIG LOTS INC Consumer Services 15.47% 1.25% -0.24%   5.44% 6.86%   2.74 3.24 (NYSE:BMY)  BRISTOL-MYERS SQUIBB CO Health -1.23% -0.89% 6.46%   24.98% 22.84%   0.70 0.70 (NYSE:BSX)  BOSTON SCIENTIFIC CORP Health 5.14% 11.72% -3.67%   28.70% 27.68%   0.45 0.30 (NYSE:CAG)  CONAGRA FOODS Consumer Non Durable 23.23% 0.31% 9.70%   11.31% 10.74%   1.02 1.15 (NASDAQ:CEPH)  CEPHALON INC Health -5.73% 19.35% 11.40%   26.65% 26.37%   0.47 0.62 (NYSE:DNB) DUN & BRADSTREET CORP Consumer Services -18.53% 4.43% 7.95%   30.41% 32.09%   0.93 1.09 (NYSE:DPS)  DR PEPPER SNAPPLE GRP Consumer Non Durable 15.11% 10.36% -0.66%   20.60% 20.60%   0.55 0.66 (NYSE:DRI)  DARDEN RESTAURANTS Consumer Services -1.78% 8.38% 8.92%   13.02% 12.80%   1.80 1.44 (NASDAQ:ERTS) ELECTRONIC ARTS INC Technology 2.34% 5.81% 14.93%   10.99% -2.24%   0.69 0.90 (NYSE:FIS) FIDELITY NATIONAL INFO Consumer Services -7.42% 7.47% -27.57%   23.50% 26.76%   0.83 0.46 (NASDAQ:FISV)  FISERV INC Miscellaneous 14.41% 11.94% 20.83%   22.99% 23.53%   0.48 0.51 (NYSE:HAS)  HASBRO INC Consumer Durable 2.47% 3.01% 4.79%   16.31% 17.62%   1.00 1.27 (NYSE:HRS)  HARRIS CORP Technology -1.48% 19.14% -5.76%   15.24% 15.96%   1.13 1.12 (NYSE:KR)  KROGER CO THE Consumer Services 4.51% 7.30% 8.21%   5.31% 5.21%   3.04 3.27 (NYSE:LO)  LORILLARD INC Consumer Non Durable -5.09% 5.62% 5.92%   33.08% 32.55%   1.44 1.81 (NYSE:NOC)  NORTHROP GRUMMAN CORP Capital Goods 1.10% 5.84% 5.84%   9.99% 11.63%   0.92 1.12 (NYSE:PEG)  PUBLIC SVC ENTPRS GROUP Utilities 7.72% 3.65% 3.65%   24.57% 30.23%   0.42 0.46 (NYSE:PFE)  PFIZER INC Health -4.75% -0.25% -0.25%   40.22% 32.09%   0.42 0.43 (NYSE:PM) PHILIP MORRIS INTL INC Consumer Non Durable 18.90% -10.87% -53.35%   18.26% 17.37%   1.78 0.78 (NYSE:RDC)  ROWAN COMPANIES INC Capital Goods -20.68% 38.68% 5.62%   33.16% 38.76%   0.40 0.49 (NYSE:S)  SPRINT NEXTEL CORP Technology -13.65% 18.30% -11.24%   29.59% 25.61%   0.62 0.61 (NYSE:SEE)  SEALED AIR CORP Basic Material -3.95% 7.47% 4.13%   16.64% 15.47%   0.85 0.97 (NYSE:STZ)   CONSTELLATION BRANDS INC Consumer Non Durable 23.76% 12.62% -3.14%   17.06% 16.97%   0.54 0.45 (NASDAQ:SYMC)  SYMANTEC CORP Technology 6.36% 25.49% 4.69%   30.39% 27.15%   0.37 0.58 (NYSE:TAP)  MOLSON COORS BREWING CLB Consumer Non Durable 14.61% 6.14% -22.88%   17.95% 17.83%   0.49 0.46 (NYSE:TMO)  THERMO FISHER SCIENTIFIC Health 7.08% 19.36% 7.71%   14.90% 18.20%   0.56 0.50 (NYSE:TSO)  TESORO CORPORATION Energy and Extraction -47.31% 29.18% 29.18%   6.76% 6.19%   3.04 3.81 (NYSE:VZ) VERIZON COMMUNICATIONS Technology 2.94% 5.37% 4.16%   32.18% 32.05%   0.46 0.48 (NYSE:WAT)  WATERS CORP Capital Goods 5.94% 10.53% 6.93%   28.15% 27.30%   0.80 0.97

To identify potentially attractive investment ideas, The Applied Finance Group (AFG) uses a combination of proprietary variables including valuation, economic performance, management quality, and Earnings Quality. In December of 2008, ValueExpectations.com released a list of companies sorted only by AFG’s Value Score (defined below). Our valuation techniques have proven successful at identifying mispriced securities, which has helped our clients select stocks that outperform their chosen benchmark.

The ValueExpectations.com blog posted in December 2008 (High Value Score Stocks - S&P 500), contained these high Value Score companies (DDS, S, NOV, MTW, SII, WFR, CHK), and outperformed the S&P 500 by 40% as of our 3-26-09 performance update. We recently checked the average performance of those picks through 8-27-2009 to find that they have returned an astounding 52% above the S&P 500, with 6 of the 7 companies outperforming. High Value Score Stocks Part 2, released on 5-7-09 has also outperformed the S&P 500 by nearly 3% since its release, with a batting average of just over 60%.

Due to the success of the first two “High Value Score” blogs, we again used valuation as a basis for selecting a new set of investment ideas. Listed below are the top 10 companies in the S&P 500 (excluding Financials) based on AFG Value Score alone. These companies look the most attractive from a valuation perspective relative to the rest of the index.

Exchange/Ticker Name Sector Valuation Attractiveness (NASDAQ:CEPH)  CEPHALON INC Health Very Attractive (NYSE:PM)  PHILIP MORRIS INTL INC Consumer Non Durable Very Attractive (NYSE:DNB) DUN & BRADSTREET CORP Consumer Services Very Attractive (NYSE:S)  SPRINT NEXTEL CORP Technology Very Attractive (NYSE:FIS)  FIDELITY NATIONAL INFO Consumer Services Very Attractive (NASDAQ:APOL)  APOLLO GROUP INC CL A Miscellaneous Very Attractive (NYSE:AES) AES CORP THE Utilities Very Attractive (NYSE:AZO) AUTOZONE INC Consumer Services Very Attractive (NYSE:TSO)  TESORO CORPORATION Energy and Extraction Very Attractive (NYSE:TMO) THERMO FISHER SCIENTIFIC Health Very Attractive

AFG's Valuation Metric – Measures the percent to target (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 (modified discounted cash flow model).

On Monday we highlighted several companies from our buy/sell list that represented investment ideas for all types of investors, which included Small and Large Cap stocks as well as Growth and Value stocks. Since Value Expectations tends to provide Large Cap Value Stocks for potential Buy ideas, earlier this week we decided it would be helpful to also highlight some small cap stocks we like from the Russell 2000. Now, moving on to the Growth investor, we will focus on companies we classify as growth stocks and find attractive within the S&P 500 (excluding Financials). By definition, AFG classifies growth stocks as companies with a Market Value/Invested Capital (MV/IC) in the top half of their sector.

 

In the table below are 10 growth stocks that we find attractive based on AFG’s valuation model, and are ranked neutral or higher based on AFG’s default recommendation.

 

Attractive Growth Companies - S&P 500 (excluding Financials)

 

AFG's Valuation Metric – Measures the percent to target (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 (modified discounted cash flow model).

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.

Management Quality – Assesses management’s ability to make wealth creating decisions.

AFG's Growth Universe - Companies in the AFG universe, which have MV/IC in the top 50% of the universe and have EPS estimates.

Market Value/Invested Capital (MV/IC) - The firm's average total equity, debt and other obligations divided by net invested capital.
 

Jon C. Ogg of Wall St. 24/7 provided a list of companies that were upgraded or downgraded on Thursday April 2, 2009 by analysts from some major firms. We took his list of companies (excluding Financials) and provided some insight on how we think each company is valued by using The Applied Finance Group’s (AFG’s) valuation model, and provided the embedded expectations for sales growth implied in the stock’s current price using AFG’s Value Expectations interface. Measuring the spread between a company’s VE sales growth expectations and what it has historically delivered will give you a good idea of which companies have the best chance of meeting or exceeding those expectations, and thus are more likely to outperform.

 

Companies With Analyst Revisions (April 2, 2009)

 

 

*AFG’s Value Expectation allows us to understand the imbedded Sales Growth, EBITDA Margins, and Asset Turnovers a company has to deliver in the future to justify its current trading price. In theory and in normal circumstances, if the imbedded future performance is very conservative relative to the company’s historical performance, the stock is regarded as undervalued. The table displays the implied future sales growth of companies assuming their EBITDA margins and Asset turnovers stay at the 5 year median levels.

These 20 companies produced the greatest returns in 2008 within the S&P 500. Let’s take a look at what is priced-in for sales growth going forward to justify their current price. Compare what expectations are priced-in (VE Sales growth) to what the company has been able to deliver the past five years (5 Year Median Sales Growth) to see if each company has realistic expectations. The more realistic the expectations are, the more likely the company will be on this list next year.

Top 20 Return S&P 500 Companies and Their VE Sales Growth

VE Sales Growth was calculated for these companies on 12/16/08

There are six companies in the S&P 500 currently trading at over $100 a share. Five out of those six are companies which have sales growth expectations priced-in to their current stock price that are lower than their historical five  year median sales growth.

Although AZO, CME, GOOG, ISRG and WPO are trading among the highest priced per share in the index, their expectations are reasonable enough to meet those sales numbers and add shareholder value. Regardless of whether the stock is trading at $10 or $100 it is not the current price that is important but the expectations that are embedded in that price.