CLF

Today we will keep the criteria of looking for cheap companies expected to improve their economic profitability (Economic Margins) the same, however this time we will eliminate companies with management teams who are unable to create wealth for their shareholders using AFG’s Management Quality variable. One of the key variables AFG uses when identifying potential investment opportunities is the Management Quality Score, which provides insight into management’s ability to create or destroy shareholders wealth.

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.

A list of the 25 top performing stocks of 2010 (ex. Financials) from within the S&P 500 index. We have taken the top 25 companies from 2010 and provided our readers 3 attractive and 5 unattractive stocks from this list based on their valuation attractiveness relative to sector peers and overall investment opportunity using key criteria that The Applied Finance Group (AFG) uses in its stock selection process including corporate performance, management quality and earnings quality to see which of the top performers still look to have upside and which look like they have run out of room to run.

If you have a bullish outlook on the recovery of the global economy over the next 2-5 years, it is important to know which industries will likely perform the best coming out of a global recession. Daniel Moser of Seeking Alpha believes that the US is likely to begin experiencing economic recovery starting in 2010, and believes that mining companies may be the most attractive industry for long-term investment opportunities.

With China and the US implementing huge economic stimulus plans - $585 billion in China and $787 billion in the US – the amount of money designated toward advancing and expanding these countries’ infrastructure greatly impacts the attractiveness of investing in mining companies. Infrastructure improvement is heavily dependent on utilizing copper and other base metals, a major part of these companies’ business. During the recent global slowdown these companies have sold off to extremely distressed levels making their current trading prices very attractive, if you believe like we do that they will bounce back and provide long term rewards to shareholders.

Another reason to be bullish on mining companies at this time is the opportunity for financially strong companies to consolidate at attractive discounts. According to Moser, most industries make the mistake of acquiring assets during a booming period, but some of these firms will realize discounted prices when they purchase competitors now that valuations have improved. Yet another positive signal the author notes is that hedge funds tend to have a macroeconomic bias and frequently invest in firms that show signs of benefiting from a global economic recovery.

Moser also makes the claim that there is evidence that the U.S. will be running into inflationary problems which in theory would hurt these firms. However their involvement in the production of gold and silver along with the fact that these companies have considerable amount of foreign exposure and that a few are based outside of the U.S. will give them the ability to survive an inflationary environment in the US.

Of the companies on Moser’s list, we find a couple of attractive investments. Freeport-McMoran Copper & Gold (FCX) and steel mini-mills Nucor Corp (NUE) and Schnitzer Steel (SCHN) stand out the most. The mini-mills are more nimble and can adjust their production more quickly to meet demand, whereas US Steel (X) is bogged down with less-efficient operations. Additionally, Cliffs Natural Resources (CLF) is exposed heavily to legacy steel producer US Steel. 

 

Mining Companies and Their Implied Sales Growth Expectations

 

*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 above table displays the implied future sales growth of these mining companies assuming their EBITDA margins and Asset turnovers stay at the 5 year median levels.

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