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Back in February Valueexpectations.com released a blog highlighting Fidelity’s Low Priced Stock Fund that follows a strategy of only investing in stocks with a share price of under $35. In that blog we provided a list of 30 stocks that we thought were attractively priced according to The Applied Finance Group’s (AFG's) valuation model broken up into three price brackets: under $10, $10 to $20 and $20 to $35.

From Feb 5th 2009 to June 5th 2009 the 30 stocks recommended as a group outperformed the S&P 500 by an average of 36.5%, the 10 stocks under $10 outperformed by 57.1%, the $10 to $20 stocks outperformed by 40.1% and the $20 to $35 stocks outperformed by 12.5% respectedly. 

Joel Tillinghast, the fund’s manager began this fund with a strategy of only investing in stocks under $10. Since this stragtegy began Fidelity has moved the stock price limit to $35 where it currently sits. Tillinghast believes that share price alone is not of importance but the lower priced, smaller-cap universe of stocks experiences the most frequent mispricing’s and also has the least amount of analyst coverage.

As an update to the prior blog on this strategy Valueexpectations.com provided a list of 30 stocks that we believe are attractively priced and do not fit AFG's default sell criteria. Each group is ranked based on valuation attractiveness. AFG's analysis begins and ends with valuation, however along the way there are other key factors AFG considers when looking for buy opportunities: expected Economic Margin improvement, management quality, earnings quality.

Attractively Priced Companies Under $30

Earlier in the week we highlighted the most attractive style and sector universes from our Monthly Market Review. As a follow up to that article we are providing a list of the 10 most undervalued stocks in the S&P500. All companies listed met The Applied Finance Group's (AFG's) Buy screen (criteria explained below) and are in the bottom half of their sector in Market Value/Invested Capital (MV/IC) which by definition qualifies the companies as part of the AFG Value Universe.

 10 Most Undervalued Stocks In The S&P500

When identifying buy ideas AFG looks for companies with the most valuation upside compared to their sector peers, above sector median expected Economic Margin change, and a management quality score that reflects a management team following a wealth creating strategy.

A brief description of AFG'sbuy criteria variables is 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 it's peers.

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

Value Universe: Companies in the AFG universe, which have MVIC at the bottom 50% of the
universe and have EPS estimates.

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

*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.

Recent Market Review:  Obama, the Budget and the “Un” Stimulus package

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Fidelity’s Low Priced Stock Fund, which launched in 1989 (18 Billion AUM) and is managed by Joel Tillinghast, follows a simple strategy… Only invest in stocks with a share price under $35. This strategy first started with Tillinghast only investing in stocks below $10 a share, but later he moved the limit up to $35 a share. He argues that share price alone is not important but that the small-cap universe contains the most frequently mispriced stocks and the least amount of analyst coverage.

Although his fund at best has been a market performer as of late, Tillinghast had taken advantage of such mispricing’s during the last 15 years, averaging an 11% annual return compared to the 6% return earned by the S&P 500 over the same period. The fund had been closed to investors since 2003, but was recently reopened in December. Fidelity says they reopened the fund to get more cash inflow to be able to take advantage of all of the investment opportunities they see in the market.

Below is a list of the top holdings in Fidelity’s Low Priced Stock Fund as well as stocks that AFG believes are attractively priced in three price brackets: under $10, $10 to $20, and $20 to $35. Compare the implied sales growth priced-in to justify the current trading price (VE Sales Growth) vs. what the company has delivered in sales growth the past 5 years (5 Year Median Sales Growth) to see if the expectations are realistic for the company to achieve. The more realistic the expectations are, compared to what has been delivered, the more likely the firm will be to out-perform.

The timing and performance of the stock market had an important impact on the outcome of the election just as the outcome of the election has had an impact on these 20 stocks since the election-day.
Listed are 10 of the best and worst performing stocks in the S&P 500 (excluding financials) since the November 4th election and their 5 year implied sales growth that the company needs to earn to be fairly valued at the closing price on 12/1/08.

*LIZ has since been removed from the S&P 500

                                           Biggest Winners Since The Election

                                       Biggest Losers Since The Election 

 Recently we also screened the S&P 500 to identify investment opportunities and identified over 150 companies (industrials) that have negative sales growth expectations embedded into their current market valuations. These companies include high quality companies such as: COH, DOW, CAH, TGT, JNJ, UTX, SBUX, and WAG, among others. If you would like to Read our study Click Here