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Twice in 2009, ValueExpectations.com highlighted “Fidelity’s Low Priced Stock Fund”, an investment strategy that has been employed since 1989 by fund manager Joel Tillinghast. The theory behind this “low-price” strategy is that stocks within the small cap space tend to experience the most frequent mis-pricings and have the least amount of analyst coverage. Mr. Tillinghast created this strategy to take advantage of the numerous inefficiencies in small caps. They started out as a strategy to invest in stocks trading below $10; that limit has since been raised to $35 to widen the pool of investable stocks. Since the prior 2 stock lists that we previously provided have outperformed, we will once again provide our readers a list of 30 attractive stocks under $35.

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!)

Ticker  Name Sector AFG Recommendation (NYSE:PFE)  PFIZER INC Health Attractive (NYSE:S)  SPRINT NEXTEL CORP Technology Attractive (NYSE:VZ) VERIZON COMMUNICATIONS Technology Attractive (NASDAQ:ORCL)  ORACLE CORP Technology Attractive (NASDAQ:DTV) DIRECTV GROUP INC (THE) Consumer Services Attractive (NYSE:Q)  QWEST CMMNCTNS INTL INC Technology Attractive (NYSE:DYN)  DYNEGY INC A Energy and Extraction Attractive (NASDAQ:EBAY) EBAY INC Consumer Services Attractive (NYSE:CHK) CHESAPEAKE ENERGY CORP Energy and Extraction Attractive (NYSE:WMT) WAL-MART STORES INC Consumer Services Attractive (NYSE:CVS) CVS CAREMARK CORP Consumer Services Attractive (NASDAQ:MSFT) MICROSOFT CORP Technology Attractive (NASDAQ:CSCO) CISCO SYSTEMS INC Technology Attractive (NYSE:BSX)  BOSTON SCIENTIFIC CORP Health Neutral (NYSE:TXN) TEXAS INSTRUMENTS INC Technology Neutral (NYSE:LOW) LOWE'S COMPANIES INC Consumer Services Neutral (NASDAQ:CMCSA) COMCAST CORP CL A Consumer Services Neutral (NYSE:MU)  MICRON TECHNOLOGY INC Technology Neutral (NYSE:XRX) XEROX CORP Consumer Durable Neutral (NASDAQ:DELL) DELL INC Technology Neutral (NYSE:EMC) EMC CORP Technology Neutral (NYSE:XOM) EXXON MOBIL CORP Energy and Extraction Neutral (NASDAQ:INTC) INTEL CORP Technology Neutral (NASDAQ:NVDA) NVIDIA CORP Technology Neutral (NASDAQ:YHOO) YAHOO! INC Miscellaneous Neutral (NYSE:MOT)  MOTOROLA INC Technology Neutral (NASDAQ:NWSA)  NEWS CORP A Consumer Services Neutral (NYSE:AMD)  ADVANCED MICRO DEVICES Technology Neutral (NASDAQ:AAPL) APPLE INC Technology Neutral (NYSE:MO) ALTRIA GROUP INC Consumer Non Durable Neutral (NASDAQ:QCOM) QUALCOMM INC Technology Neutral (NASDAQ:AMAT) APPLIED MATERIALS INC Technology Unattractive (NYSE:AA) ALCOA INC Basic Material Unattractive (NYSE:T) AT&T INC Technology Unattractive (NYSE:HAL) HALLIBURTON CO Capital Goods Unattractive

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.

+View our List of Value Expepectations Recommended Articles

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

About the AFG Screener

Professional investors have many ways to screen and narrow their list of constituents to create a focus list of companies they use to select from to develop their portfolios. In the industry, there are many screeners that are part of subscriptions to databases and investment tools, however, many of them do not provide guidance on the best screening methods to use. Created by The Applied Finance Group (AFG), the AFG Screener tool is a web-based company-screening application located on AFGView.com that is designed to save you time when narrowing your list of constituents. More importantly, AFG’s screener allows you to use proprietary variables that have been proven to outperform, helping investors make better investment decisions.

AFG’s Screener allows clients to find aggregate groups of companies that meet specific criteria from AFG’s entire global universe of over 14,000 securities. Using the Screener, one can find a list of companies that either match one of AFG’s preset screens or one based on a customized screen that you create.

The AFG Screener identifies attractive valuations, strong management teams, corporate performance, and the quality of earnings of a company as well as all traditional financial variables,

Because AFG’s Screener is web-based, clients can gain access from anywhere that has an internet connection, convenience and ease of “one-click screening” with our default screens, various forms of result presentations, and compatibility with Microsoft Excel for further analysis.

How to Use AFG’s Screener

Access AFG custom built screens that many clients regularly utilize that include AFG’s proprietary Economic Margin (EM), valuation and management quality variables along with many others.

Build your own custom screens using any variables you are familiar with such as price multiples and other accounting information by themselves or coupled with powerful AFG variables with just a few clicks of the mouse.

Once you have narrowed your list of constituents to those companies that meet your specific criteria you can easily upload your new list into AFG’s valuation model to analyze each company in greater detail or see how they rank vs. their peers on key AFG variables.

Default / Custom Screens

Whenever a new user is introduced to AFG’s Screener, they are provided with two default screens – AFG’s Default Buy screen and AFG’s Default Sell screen. Using these screens, one can filter companies based on AFG’s buy/sell criteria.

However, the AFG Screener is very intuitive allowing clients to create their own screens based on custom criteria. There are countless combinations that can be used to create a custom screens, as there are over 600 variables to choose from. AFG’s Screener tool can be used to list companies based on Indexes, Sectors, Industries, and previously created Portfolios.

Using Excel / Further Research

AFG screens can also be accessed using AFG’s Excel add-in to combine results with other spreadsheets or to create a report for your investment team. Exporting your information will give you more freedom to read, organize and document your data as well as pull in other variables within AFG’s Excel add-in to easily rank order your list of companies based on the same variables available within the screener.

Example Screen:

Below is a list of 12 companies that resulted from a quick screen that sought to identify those companies within the S&P 500 with attractive valuations, market cap above $1 billion, expected to improve EMs greater than sector peers, and that have a current stock price of under $30. Improving EMS and an attractive default AFG valuation rank is a good place to start when looking for the companies most likely to outperform. This is just one simple example of the capabilities of using AFG’s screener tool to select a focused list of stocks that are the most likely to outperform and a list that is worthy of more time spent on due diligence on the companies that meet the specified criteria.

 

The Applied Finance Group would also  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.

Register to View Complete Market Review and Sector Analysis, it's FAST and FREE!

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).

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

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

On January 13th, 2009, we posted a list of companies that were, “In Shape and Looking Good.” The screen looked at the Altman Z-Score (a bankruptcy forecast model) and valuation. On January 14th, Nortel Networks (NT), filed for bankruptcy protection. As of January 13, 2009, Nortel had a Z-Score of -3.5. As we posted earlier this week, Dr. Altman’s heuristic is broken down into 3 zones:

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

As you can see from the chart below, Nortel Networks (NT) has a Z-score of -3.5 putting it in the “Likely to go Bankrupt in the Next 2 Year” category. Looking at its peers, ALU looks in jeopardy, where CSCO and JNPR are safe in the “Not Likely to go Bankrupt in the Next 2 Years” zone.

Below is a List of Firms in the R1000, that have negative Z-scores like Nortel Networks (NT) as of January 13th, 2009. Besides Z-Score this table also provides implied sales growth expectations priced-ion to justify their current price. Those with an N/A for VE Sales Growth need to fix their business model before we begin to evaluate the embedded expectations in their stock's price.

*VE Sales Growth calculated for these firms on 1-13-09