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Fidelity’s Low Priced Stock Fund: Low Priced Stocks We Like - Walgreen Company (NYSE:WAG) and Microsoft Corp. (NASDAQ:MSFT)
Micron Technology (NYSE:MU) - Consistent Wealth Destroyer
The Applied Finance Group’s (AFG’s) research and suite of investment tools help investors to easily understand a company’s true economic profitability, as well as if the company’s asset management policy is suitable to maximize that profitability. AFG’s Wealth Creation Report (WCR) allows you to visually analyze a company’s historical Economic Margin (EM) level, current EM and expected change in EM based on projections built out by AFG’s default valuation model, which takes into account the total cash flow a company delivers. A company that earns above its cost of capital (positive Economic Margins) and is growing its asset base is considered to be following a wealth-creating strategy. Back-tests have proven these companies to be more likely to outperform those companies following a wealth-destroying strategy (negative Economic Margins and growing assets).
Avoiding firms with management teams who try to grow a negative profitability business has helped our clients since 1996 avoid potential torpedoes in the market. AFG believes that if a firm is not profitable, it needs to divest losers and focus on its core competencies to get its profitability levels back on track and earn the right to grow, rather than throw more money at a losing business. After getting an understanding of how profitable a firm is and which direction the firm’s profitability is headed, investors must then understand how much a company is growing out its assets to take advantage of its current profitability or what to divest in order to fix its profitability.
Beyond having positive Economic Margins (EMs) and growing assets, investors want to see a company improve its EMs at a greater rate than its sector peers, as these companies have also proven to be more likely to outperform than companies with declining EMs.
Below is an example of Micron Technology (NYSE:MU), a company AFG considers to be a consistent wealth destroyer, identified by using AFG’s Wealth Creation Report.
Just because a company has historically been a consistent wealth creator/destroyer does not necessarily mean the company will continue this pattern nor does it mean that the company currently looks unattractive from a valuation perspective. Over the past two years, Micron Technology has divested parts of its business, which may have been a good thing as its EMs are projected to improve in the upcoming year. However, the company currently looks to be overvalued according to AFG’s valuation model. To see how MU rates as far as overall investment attractiveness view the chart below.
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AFG's Wealth Creation Report is a 3part chart:
The first chart is a summary of a company’s economic performance over time, as well as insight into how analyst EPS forecasts project AFG’s default EMs over the next two years.
• EM – Productive Capital = (Cash Flow minus Capital Charge excluding Intangibles) divided by the Inflation Adjusted Productive Capital.
• EM – Invested Capital = (Cash Flow minus Capital Charge including Intangibles) divided the by Inflation Adjusted Productive Capital.
•Val Score = Ranked Percent To Target for the current calendar yr. where 100 is the most undervalued and 0 is the most overvalued (ranked across all firms in database with forecasts for 4,000 firms).
• EM Chg = One year out forecast EM minus last reported fiscal year's EM. Invested Capital EM is used.
The second part of the chart is the Asset Growth chart allows additional insight not only the growth of a company, but how that company’s growth strategy has affected their economic performance.
• Assets – Steady Growth (1 Yr) = The real growth rate at which a firm can increase its capital base given internally generated cash, while maintaining a constant capital structure.
• Assets – Actual Growth (1 Yr) = Real year over year change in Inflation Adjusted Invested Capital achieved by the firm. Note: All actual growth is “actual”, i.e. 2007 growth represents growth from most recent quarterly balance sheet.
This data can then be used to identify how the stock has performed in relation to the market place.
• Return Net Market = The company's cumulative total return relative to the cumulative market-weighted average total return of the largest 2000 companies for the equivalent time period.
Be on the lookout for Weekly company highlights using The Applied Finance Group's Wealth Creation Report.
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Most Actively Traded Stocks (S&P 500) – Including Wal-Mart Stores (NYSE:WMT) and Apple Inc. (NASDAQ:AAPL)
The list of most actively traded stocks in the S&P 500 seems to attract the most attention amongst the investment community and always create a good amount of “Buzz”. We decided to take the list of the most actively traded stocks over the last 50 trading days (excluding financials) and run them through The Applied Finance Group’s (AFG’s) meat grinder to see which are worthy of the hype and are attractive investment opportunities and which you should probably stay away from.
AFG uses a set of criteria in its stock selection process that has proven successful at identifying winners and losers in the market including its proprietary measure of corporate performance (Economic Margin), valuation, management quality and earnings quality among other criteria. Of the companies listed that are heavily traded, AFG believes the companies with expected improvement in Economic Margins, attractive valuations, and a wealth creating management team are the companies that will be the most likely to outperform the market and their sector peers. (register now to receive exclusive buy ideas- it's fast and free!)
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The rankings above were provided using AFG’s research product AFGView.com and are ranked based on AFG’s overall investment opportunity signal, valuation signal and expected changes in Economic Margins. The companies must rank as attractive or unattractive in all 3 categories or the firm is listed as neutral.
Below is a brief description of those variables with informative links.
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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AFG Recommendation Performance
9/1998 – 5/2009
Annualized Returns
Source: AFGView client databases from 9/1998 – 5/2009
Universe size: 4,000 to 5,500 firms
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Top S&P 500 YTD Returns – Which Companies/Sectors Have Performed Best So Far - Including Nordstrom Inc. (NYSE:JWN)
With 3 Quarters of 2009 now in the books, we thought it would be timely to provide a list of the top 20 performers in the S&P 500 so far this year to give investors an idea of which stocks have been doing well. Along with the list of top 20 performing companies, we have also provided a breakdown of the average return by sector as defined by AFG vs. the entire S&P 500 index to show which sectors have been leading the way. 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 Performers In S&P 500 YTD (Total Return)
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2009 YTD Sector performance (average return %) in S&P 500
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.
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Understanding Wealth Creation – Using AFG’s Wealth Creation Report Including Best Buy (NYSE:BBY) Cognizant Tech.
Investors who use The Applied Finance Group’s (AFG’s) research and suite of investment tools have the ability to easily understand a company’s true economic profitability, as well as if the company’s asset management policy is suitable to maximize that profitability.
A company that earns above its cost of capital (positive Economic Margins) and is growing its asset base is considered to be following a wealth-creating strategy. Backtests have proven these companies to be more likely to outperform those companies following a wealth-destroying strategy (negative Economic Margins and growing assets). Avoiding firms with management teams who try to grow a negative profitability business has helped our clients since 1996 avoid potential torpedoes in the market. AFG believes that if a firm is not profitable, it needs to divest losers and focus on its core competencies to get its profitability levels back on track and earn the right to grow, rather than throw more money at a losing business. After getting an understanding of how profitable a firm is and which direction the firm’s profitability is headed, investors must then understand how much a company is growing out its assets to take advantage of its current profitability or what to divest in order to fix its profitability.
Beyond having positive Economic Margins (EMs) and growing assets, investors want to see a company improve its EMs at a greater rate than its sector peers, as these companies have also proven to be more likely to outperform than companies with declining EMs. AFG’s Wealth Creation Report (WCR) allows you to visually analyze a company’s historical EM level, current EM and expected change in EM based on projections built out by AFG’s default valuation model, which takes into account the total cash flow a company delivers.
Below are a few examples of companies AFG considers to be following wealth-creating or wealth-destroying strategies, identified by using AFG’s Wealth Creation Report.
Best Buy: Consistent Wealth Creator
Amphenol Corp: Consistent Wealth Creator
Cognizent Technology Solutions: Consistent Wealth Creator
Southwest Airlines: Consistent Wealth Destroyer
Micron Technology: Consistent Wealth Destroyer
Electronic Arts: Growth at the expense of its Economic Margins (Wealth Destroyer)
AFG's Wealth Creation Report is a 3 part chart :
The first chart is a summary of a company’s economic performance over time, as well as insight into how analyst EPS forecasts project AFG’s default EMs over the next two years.
• EM – Productive Capital = (Cash Flow minus Capital Charge excluding Intangibles) divided by the
Inflation Adjusted Productive Capital.
• EM – Invested Capital = (Cash Flow minus Capital Charge including Intangibles) divided the by
Inflation Adjusted Productive Capital.
•Val Score = Ranked Percent To Target for the current calendar yr. where 100 is the most undervalued
and 0 is the most overvalued (ranked across all firms in database with forecasts for 4,000 firms).
• EM Chg = One year out forecast EM minus last reported fiscal year's EM. Invested Capital EM is used.
The second part of the chart is the Asset Growth chart allows additional insight not only the growth of a company, but how that company’s growth strategy has affected their economic performance.
• Assets – Steady Growth (1 Yr) = The real growth rate at which a firm can increase its capital base
given internally generated cash, while maintaining a constant capital structure.
• Assets – Actual Growth (1 Yr) = Real year over year change in Inflation Adjusted Invested Capital
achieved by the firm. Note: All actual growth is “actual”, i.e. 2007 growth represents growth from most
recent quarterly balance sheet.
This data can then be used to identify how the stock has performed in relation to the market place.
• Return Net Market = The company's cumulative total return relative to the cumulative market-weighted
average total return of the largest 2000 companies for the equivalent time period.
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Identifying Large Cap Investment Opportunities - Including McDonalds (NYSE:MCD) Sprint (NYSE:S) and Hasbro (NYSE:HAS)
The Applied Finance Group (AFG) has a disciplined approach for identifying companies that are expected to outperform and underperform the market by using proprietary metrics and measurements that have been tested and proven through time. Because AFG’s research is fundamentally derived, AFG’s quantitative analysis spans across growth and value stocks, all sectors, industries, and market caps with over 20,000 covered securities globally. Using AFG’s proprietary criteria, AFG publishes a monthly buy/sell list to provide clients with a refined focused list as a starting point for potential investments. AFG clients can then use Value Expectations to further analyze the expectations embedded in a security’s price and to build out their own model to refine an intrinsic value of a company based on their own expectations.
When searching for Large-Cap ideas, AFG’s Buy/Sell list is a good starting place as it has proven to create a significant spread in performance between companies that come up on AFG’s buy list and those on the sell list. Further focusing on companies based on AFG’s proprietary screening criteria (Economic Margin, valuation, quality of earnings, and management’s ability to create shareholder wealth) will save investors time in their research process. The result is a target group of stocks that can help you outperform as well as identify potential torpedoes to avoid in your portfolios.
Below is a list of attractive and unattractive companies in the S&P 500 from each major sector (as defined by AFG). It serves as a focus list of companies for investors to begin with as they meet AFG’s criteria. They are more likely to outperform their sector peers and the S&P 500, the benchmark that AFG’s clients most often compare themselves with.
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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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S&P 500 - YTD Returns by Sector
Below is a chart and table outlining the 2009 year to date performance of the sectors within the S&P 500. The Technology sector has lead the way thus-far while Utilities and Financials have been dragging down the overall average of the index. As previously reported in our Market Forecast Project, Technology was also voted most attractive sector according to our survery of professional investors. These sectors are based on the sector classification created by The Applied Finance Group.
Source(The Applied Finance Group)
Source(The Applied Finance Group)
| Ticker | Name | Sector | Attractiveness | Valuation | EM Change |
| Attractive Technology Companies - S&P 500 | |||||
| HRS | HARRIS CORP | Technology | Attractive | Attractive | Positive |
| IBM | INTERNAT BUSINESS MACHNS | Technology | Attractive | Attractive | Positive |
| ORCL | ORACLE CORP | Technology | Attractive | Attractive | Positive |
| WDC | WESTERN DIGITAL CORP | Technology | Attractive | Attractive | Negative |
| HPQ | HEWLETT-PACKARD CO | Technology | Attractive | Attractive | Negative |
| Unattractive Technology Companies - S&P 500 | |||||
| AMAT | APPLIED MATERIALS INC | Technology | Unattractive | Unattractive | Negative |
| JDSU | JDS UNIPHASE CORP | Technology | Unattractive | Unattractive | Negative |
| KLAC | KLA-TENCOR CORP | Technology | Unattractive | Unattractive | Negative |
| MU | MICRON TECHNOLOGY INC | Technology | Unattractive | Unattractive | Negative |
| CIEN | CIENA CORP | Technology | Unattractive | Unattractive | Negative |
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.
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Professional Investors Vote For Technology
What is the most attractive sector? That's one of the questions we asked a group of professional investors in our Market Forecast Project. The answer varied from person to person, but there was a general consensus. The majority was in favor of Technology, which pulled away by far with 41 of a possible 98 first place votes. Survey participants were asked to rank a list of sectors from 1-11 in order of how attractive they found that sector to be over the next 12 months. Technology ranked highest with an average ranking of 2.7, well ahead of the rest; Basic Material placed second with an average rank of 4.8. We've put together a list below of both attractive and unattractive companies within the Technology sector. It may be worthwhile to take a closer look at the companies listed. If the insight provided by the survey’s investment professionals holds true, you could be among those who outperform the market.
Market Forecast Sector Ranking Results
15. Rank Order, which sector seems most attractive to you over the next 12 months?
(1 = Most attractive)
Results Have Been Ranked by Most Attractive
1 Technology
2 Basic material
3 Energy & extraction
4 Health
5 Capital goods
6 Consumer non-durable
7 Financials
8 Consumer services
9 Consumer durable
10 Transportation
11 Utilities
10 Attractive Technology Stocks
10 Unattractive Technology Stocks
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.
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).
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S&P 500 Top 10 Returns 2009 YTD
Now that we are more than halfway through 2009, It is an excellent time to highlight the top performers in the S&P 500 year-to-date and see which companies look the most attractive according to The Applied Finance Group (AFG). AFG’s valuation techniques have proven successful since 1996 at identifying mispriced securities and helping their clients take advantage of those market inefficiencies. Beyond valuation AFG helps clients understand the true economic profitability a company earns by using their Economic Margin methodology.
Economic Margin (EM) corrects distortions caused by traditional accounting policies to give a more accurate assessment of a company's true profitability. It is important to understand the direction a company's EM's are heading because companies expected to improve their Economic Margins have proven to be more likely to outperform than those with EM’s expected to deteriorate. The EM Framework addresses profitability, competition, growth and cost of capital. When factoring in each of these variables, investors can fully assess a company's value.
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.
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).
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S&P 500 - Potential Torpedoes (ex. Financials)
ValueExpectations.com has continued to provide investment ideas to help our readers make better informed investment decisions which leads to outperformance. In addition to finding buy opportunities, VE.com also understands the importance of avoiding potential torpedo’s given the current market volatility.
ValueExpectations.com has compiled a list of potential torpedo stocks within the S&P 500 that all contain several characteristics that AFG finds unattractive when searching for potential investment ideas. If one of these firms is a portfolio holding we recommend careful evaluation as they could all be torpedo’s.
The 15 firms listed below all meet AFG’s Strong Sell Criteria. In addition, these companies are all projected to earn less than their cost of capital which means they will earn a negative Economic Margin and all of these companies have a Z-Score (Altman Z-Score) in the at-risk range or risk of bankruptcy in the next 2 years. For a review of your current holdings using AFG’s research tools CLICK HERE FOR A FREE TRIAL.
S&P 500 - Potential Torpedoes (ex. Financials)
AFG Sell Criteria: When identifying possible sell/short opportunities (torpedoes) The Applied Finance Group (AFG) starts by running a screen using its proprietary Sell Criteria variables starting with Economic Margin. Economic Margin is a measure of corporate performance that identifies how profitable a company is by measuring how much the company earns above or below its cost of capital. In addition to corporate performance, AFG looks to identify those companies that are unattractively priced using our valuation model. Lastly AFG evaluates how well companies run their business using its Management Quality score, identifying companies that have management teams that destroy wealth.
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.
The Altman Z-score - 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
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Best/Worst Analyst Rated Companies - Our Take
Bloomberg provides a score for companies within the S&P 500 based on an average of all analyst ratings from the street. Below is a table highlighting companies with the best analyst ratings, largest increase in rating, highest price targets, and worst analyst ratings and the valuation attractiveness of each of these companies based on The Applied Finance Group’s (AFG) valuation model.
Companies within each of these groups are ranked from most attractive from a valuation perspective to the least attractive. VE.com will actively track the performance of these recommendations and see how they stack up to the analyst recommendations in each group. AFGview.com, AFG’s professional investor website allows you to compare any company using their rating versus the consensus ratings of the sell side. If you are interested in an analysis on a specific company, contact afgsales@afgltd.com.
Best/Worst Analyst Rated Companies (Bloomberg)
AFG's 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.
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Sector Valuation Outlook - Technology
In our May Market Review we released a series of graphs representing the valuation attractiveness of each sector relative to its historical norms and to the entire AFG universe. Below is a graph representing the AFG Technology sector which is attractively priced when you compare against its historical trading ranges (red line) and when comparing against the overall AFG Universe (represented by the value of 1). Listed are the 10 most attractive and 10 least attractive companies in the AFG Technology sector that are within the S&P 500. Also listed below the graph is an explanation of AFG’s Relative Valuation Chart.
Technology Sector Relative Valuation Chart
Relative Valuation Chart -This graph shows the Percent to Target Current (Valuation Attractiveness) for a universe relative to the overall market. Values greater than 1 indicate the universe is more undervalued than the market, while values less than 1 indicate the opposite. The red line identifies the historical median value to provide a basis to understand valuation levels relative to historic norms. This example illustrates that the median Technology company is undervalued relative to the market currently and has been trading at a discount to its historic relative valuation, indicating a potentially attractive opportunity.
Top/Bottom 10 Companies In AFG Tech Sector Ranked by Valuation Attractiveness (within S&P 500)
Note: Telecommunications companies are included in the AFG Technology Sector
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Biggest Movers - January 2009
Here are the best and worst performing stocks in the S&P 500 for the month of January excluding financials. 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.
Top 10 stocks in January (excluding financials) and Sales Growth Expectations
Worst 10 stocks in January (excluding financials) and Sales Growth Expectations
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