MHS

The market environment over the last few years has been muddled by many things including but not limited to corporate scandals, major bankruptcies and the overall effect of the recession. These recent events have been a constant black cloud over the confidence investors have in the markets as well as in individual companies in Corporate America. Investors tend to find some solace in their investments when the company proves to be reliable and transparent in their management as well as accounting practices. Avoiding companies that make poor management decisions and that tend to experience earnings blow-ups are one of the major advantages experienced by clients of The Applied Finance Group (AFG). AFG has an expertise in understanding management’s strategies and its ability to create wealth for shareholders, as well as an expertise in looking beyond traditional accounting numbers to see the true profitability companies earn. The 23 companies listed below have met all of the criteria to make them look like the most reliable investment opportunities within the Russell 1000 index including Hewlett-Packard Co. (NYSE:HPQ) and Medco Health Solutions (NYSE:MHS)

A list of attractive stocks from within the Health sector that meet AFG’s definition of attractive based on Valuation, Corporate Performance, Management Quality and other key criteria AFG uses to identify the stocks that are most likely to outperform from within each sector. The Health sector has consistently ranked as the 2nd best sector to invest in (next to Technology) over the next year according to participants of The Market Forecast Project, a monthly survey of professional money managers.

Healthcare reform has been a hot topic of discussion in the news and on blogsites all over the country as the Obama administration mulls over whether or not a public option for healthcare makes sense and what a plan like that would entail. Any new reform to the current healthcare plan would have a great effect on stocks within the Healthcare sector. Below is a list of stocks we find attractive and a few that we find unattractive within the S&P 500 Health sector. The chart consists of each company’s attractiveness as an investment opportunity using The Applied Finance Group’s (AFG’s) buy/sell criteria (explained below), and also grades each company based on expected Economic Margin (EM) change and valuation ranks within the sector. Companies expected to improve EMs and that have a more attractive valuation than their sector peers have proven through backtests to be more likely to outperform than stocks AFG views as overvalued and that have an expected decline in EMs.

 

Source (The Applied Finance Group)

*Valuation & EM Change are Ranks within their sector

AFG's Buy/Sell Criteria - factors in Economic Margin, Management Quality, and AFG's Valuation Metric. In order to determine Management Quality, AFG scores management on their growth decisions in accordance with the company’s ability to either create or destroy wealth. AFG's Valuation Metric measures a company's Percent to Target (the 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.

In yesterdays article we provided an update of the performance of our annual HOT STOCK LIST:

We also provided an update of the performance of the Toreador Large Cap Fund, TORLX which uses AFG’s Economic Margin Framework as part of its investment philosophy.

As you may note, both have done very well!

Today we decided to provide a Buy/Sell list to VE’s registered visitors applying some of these same investment principles: Economic Margin, Management Quality, and a company's Percent to Target (the deviation between a stock's current trading price and its current default target price according to AFG).

Below is a preview of the list which includes a Buy/Sell Recommendation on each Stock. The complete list, accessible to Value Expectations registered users, contains around 500 Stocks.

S&P 500 Rank (Preview) - August 11th 2009
Ticker	Company	Price	Recommendation
DRI	DARDEN RESTAURANTS	32.61	Strong Buy
KR	KROGER CO THE	20.93	Strong Buy
WLP	WELLPOINT INC	51.9	Strong Buy
AOC	AON CORP	40.55	Buy
FLR	FLUOR CORP	57.49	Buy
PCG	PG&E CORP	40.36	Buy
AMT	AMERICAN TOWER CORP	32.37	Neutral
IRM	IRON MOUNTAIN INC	28.85	Neutral
NOV	NATIONAL OILWELL VARCO	37.1	Neutral
BEN	FRANKLIN RESOURCES INC	92.13	Sell
EXPD	EXPEDITORS INTL WASH INC	33.04	Sell
QCOM	QUALCOMM INC	45.74	Sell
JDSU	JDS UNIPHASE CORP	5.93	Strong Sell
MWW	MONSTER WORLDWIDE INC	14.9	Strong Sell
NYT	NEW YORK TIMES	8.1	Strong Sell

Source: The Applied FInance Group

To download the complete list click here.

Every June, The Applied Finance Group (AFG) hosts its annual conference in Las Vegas to help its clients improve their understanding of AFG’s methodology and valuation framework. Putting these concepts into practice, AFG also provides several actionable Buy ideas that clients can add to their portfolio, upon returning to their office. One of the most popular sessions during the conference is called “Hot Stocks”- a time when AFG analysts give detailed analysis of several stocks that are currently of great interest to the investment community. Since its release on June 12, 2009, the “Hot Stocks” portfolio has outperformed the Russell 1000 by 5.85%. Below is a look at the four Buy recommendations within the “Hot Stocks” portfolio, and their performances as of August 13th 2009. Also provided below is the performance of the Russell 1000 index during the same time period.

Tomorrow Value Expectations will be issuing a ranking of the entire S&P 500 to registered Valueexpectations.com users. Register now to ensure that you receive this article.

Additionally Toreador's Large Cap Fund (TORLX) which uses AFG's Economic Margin Framework as part of its investment philosophy has recently crossed it's 3 year track record threshold, Click here to view  TORLX performance.

To identify potentially attractive investment ideas, AFG usually uses a combination of proprietary variables to develop of focused group of potential buy ideas that meet criteria based on valuation, economic performance, management quality, and Earnings Quality. In December of 2008 ValueExpectations.com released a list of companies narrowed only by the valuation properties of the company using AFG’s Value Score (defined below). Our valuation techniques have proven successful through time at identifying mispriced securities and helping our clients identify investment opportunities resulting in outperforming their chosen benchmark. .

The ValueExpectations.com blog posted in December 08 (High Value Score Stocks - S&P 500) contained these high Value Score companies (DDS, S, NOV, MTW, SII, WFR, CHK) had returned 40% above the S&P 500 as of our 3-26-09 performance update and a recent check of that performance on 5-5-09 was even better, currently these companies have returned an astounding 64.5% above the return of the S&P 500 during the same time period (12-29-08 to 5-5-09).

In this exercise we used valuation independent of other key proprietary variables we use to identify good investment opportunities. Although valuation works well on a stand-alone basis, it works even better when used with AFG’s Economic Margin, Management Quality, and Earnings Quality variables.

Listed below are the top 10 companies in the S&P 500 (excluding Financials) based on AFG Value Score alone. These companies all look the most attractive from a valuation perspective relative to the rest of the index.

AFG High Value Score Stocks

 

Valuation Model – Using AFG’s modified discounted cash flow model to measure the intrinsic value of a firm compared to its peers.

AFG's Value Score - A score which represents the ranked percent to target (deviation between stock’s current trading price and AFG’s current default target price) or attractiveness (upside) relative to the universe. A Value Score of 100 is the most undervalued and 0 is the most overvalued company in the universe.

*Start Date for 2004 is 6/10/2004 (inception) *Returns 6/10/2004 - 4/21/09
*AFG50 is a model portfolio and results do not include management fees or transaction costs *AFG50 is re-balanced at end of each Quarter to remain sector neutral vs. the S&P500
*Average Annual Turnover: 18%

AFG 50:
• An actively managed portfolio of 50 stocks, remaining sector-neutral.
• Long-only and targeting turnover of less than 40% annually.

Our Goals:
• To consistently beat the index our clients are most often measured against, the S&P 500.
• To serve as an outsourced research team, distributing relevant content to our clients on a weekly basis.
• To provide consistent, actionable buy ideas in each major economic sector.

Sample Reports and Process Overview:

Full Report:   MEDCO HEALTH SOLUTIONS (MHS)
Update:    United Technologies Corp. (UTX) Q109 Update
Special Note:   Note on ORCL to Acquire JAVA 

AFG 50 Process Overview (PDF)

Professional Investors: Click here for more information  and a Free Trial of The AFG 50

Individuals: Email us for more information on Advisors using this or similar investment strategies
info@valueexpectations.com

In life, the most attractive people are in shape and have good looks, just look at Hollywood. The same is true the majority of the time in investing. The most attractive stocks have healthy financial statements and look good from a valuation standpoint.

The Altman Z-score is 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. A common critique to this metric is that it was developed over 40 years ago and is no longer relevant.

In 2001, Professor Joseph D. Piotroski of The University of Chicago Graduate School of Business, published a paper called, Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers. Piotroski showed that value investors were rewarded by looking at a firm’s financial health and he showed that Z-score was a meaningful statistic.
More recently, on December 5, 2008, Dr. Altman was called to testify before a House of Representatives Committee on the condition of U.S. Automakers. In his testimony, he noted that Bloomberg, Inc. reported, “that approximately 1,000 users of their system per day access the Altman Z-Score model.”

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

Using AFGView.com, we screened for firms that looked relatively attractive from a valuation perspective and had an Altman Z-Score above 2.99. Below is a list of those firms. Later we will look at firms that are expensive and have a Z-Score below 1.8.

Sales Expectations for Companies with an Attractive Valuation and Healthy Balance Sheet

According to MotleyFool.com, InvestorPlace.com, Jubak’s Journal, Cramer, and FortuneMagazine.com these are the most attractive stocks to own in 2009. Compare the sales growth priced-in to justify the current stock price (VE Sales Growth) to what the company has achieved in revenue growth over the last five years (5 Year Median Sales Growth) to see if what’s priced-in is a reasonable number for the company to meet or exceed expectations. Couple the expectation information with AFG’s ranking for a stock’s attractiveness relative to the universe (Value Score AFG) to find companies that we find attractive on a default basis that also have low expectations for growing sales compared to what they have delivered the past 5 years. Companies with High Value Score’s and low sales growth expectations will be the companies on this list that are more likely to out-perform.

 

Recommended Stocks for 2009

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

AFG Market Forecast Project
Insights From
Professional Investors
 
The Applied Finance Group would like to invite professional investors to join AFG’s Market Forecast Project so you can better understand what your peers currently think about the market and cultivate the “wisdom of Crowds” into actionable investment ideas and themes. 
Click here to learn more

According to Forbes.com, Cramer and a few other financial blog-sites the following qualities are usually found in stocks that do well in economic downturns of extended time periods.

• Consumer necessities
• Ability to pay a dividend
• Ability to add employees as other firms cut back
• Productivity increases as market goes down
• Healthcare stocks
• Legacy Companies – high quality company with long business history
• Involved in Military
• Oil industry
• Infrastructure
• Companies that sell used goods
• Generic products
• Overseas exposure

The following companies all have one or more of the above qualities to help them survive and perform well in an economic downturn. This table provides the implied 5 year sales growth priced-in to the stock to justify its current price along with the 5 year median achieved sales growth. Compare the revenue growth priced-in to what the company has been able to deliver in the past 5 years to see if the expectations are reasonable enough for the company to meet. Companies with reasonable expectations compared to what they have achieved are the most likely companies on the list to out-perform.

Stocks with Recession Resistant Qualities & Sales Growth Expectations