DAN

Just as we did Friday for the S&P 500, for our small cap focused readers we are providing a list of the top 20 performing stocks in the Russell 2000 as well as a sector breakdown of the YTD returns from the index to keep up to date on which companies and sectors have lead the way thus far through 3 quarters of 2009. Also by using The Applied Finance Group’s (AFG's) research and valuation model we have provided further analysis on 4 of the top performing companies, 2 that we find attractive going forward and 2 that we find unattractive, based on valuation attractiveness, expected improvement in economic profitability and the overall investment attractiveness, which is based on various criteria AFG uses when identifying long/short opportunities.

Top 20 Returns (YTD) - Russell 2000

2009 YTD Sector Performance (average return %) Russell 2000

Here are a few companies from the list of top 2009 returns and we view these companies going forward based on valuation, Economic Margin Improvement, and other criteria AFG uses to value securities.

 Source: EconomicMargin.com

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.

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Recently, Moody’s released a list of what they call “Bottom Rung Companies” which is based on the company’s ability, or lack thereof, to pay back the debt it owes. The 283 companies on the list roughly represent the riskiest 15% of all firms that Moody’s tracks. Moody’s does not always designate the most appropriate ratings (Fannie Mae and Freddie Mac were rated AAA before defaulting), so we decided to take their list into our own hands and provide the true bottom rung companies.

With so much negative news going around and many companies declaring bankruptcy, it is no surprise that measures of a firm’s financial strength, such as the Altman Z-Score (likelihood of a company to go bankrupt in the next 2 years), have been re-gaining popularity in the current market environment. So to help with our analysis, we used the Z-Score metric to analyze the companies on Moody’s list, as well as The Applied Finance Group’s (AFG’s) screening variables to determine how attractive these firm’s are from a valuation standpoint, and how each company’s forecasted profitability for their fiscal 2009 year looks (Forecasted Economic Margin). As a result, ValueExpectations.com has put together a list of the 17 “riskiest” companies to avoid. Each of these companies have “at risk” level Z-Scores, unattractive valuations, and are forecasted to achieve negative profitability (EM) for their 2009 fiscal year, all of which indicate that they will be more likely to underperform.

Below the table is a short description of the Altman Z-score and a breakdown of what the scores mean, along with a brief description of what Economic Margin (EM) is and how it is calculated.

 17 Companies At Risk of Bankruptcy

 The Altman Z-score defined: A metric that gives insights into the likelihood of a firm going bankrupt in the next 2 years. The model was developed by Professor Edward I. Altman of the NYU’s Stern School of Business and first published in The Journal of FINANCE in September 1968.

The Altman Z-Score breaks down firms into 3 zones:

• >2.99 – Not Likely to go Bankrupt

• 1.8 - 2.99 – Gray Area

• <1.8 – Likely to go Bankrupt in the Next 2 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. more EM details (PDF)

 Economic Margin Calculation:

Related Article: EPS Increased.....Company Underperformed?

Related: Read our Economic Margin white paper which was published in the book: Value-Based Metrics: Foundations and Practice Edited by: Frank J. Fabozzi and James L. Grant Pages 157 – 178: Click Here