SNDK

With 2009 winding down and a full year in the books for the current administration, we have provided a breakdown of the best performing stocks since President Obama was sworn in as President on November 4, 2008.

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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)

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.

Other Popular Articles: 

Keeping an eye on the big movers in the market does not help investors determine which stocks are poised to continue their upward or downward movement. To help our devoted readers identify the movers that still look fundamentally sound and those to walk away from, ValueExpectations.com has scored each of the top 10 Hot and Cold stocks of the month based on Valuation Attractiveness and Economic Margin Change.

If an investor should consider adding any of these stocks as a holding for a portfolio, one should look for companies with attractive valuations and expected improvements in a company’s Economic Margin (EM) which essentially is a measure of a company’s true economic profitability. As an additional level of analysis, we also recommend understanding the embedded expectations that are priced into each of these stocks.

AFG’s Valuation techniques and understanding of economic profitability have proven to identify mispriced securities in the market and help clients take advantage of mispriced securities. Accurately assessing a company’s profitability and understanding how to answer key questions such as… What is the cash flow generated by the company’s operations? How much capital is required? What are the opportunity costs of this capital? This robust process is what sets AFG’s corporate performance metric Economic Margin (EM) apart from other Value Based Metrics such as an IRR calculation, a CFIRR or a RONA Economic Profit approach.

It is not surprising to see the list of best performers dominated by Tech stocks as professional investors in our last month’s sentiment poll identified Technology as the most attractive sector to bet on in the upcoming months and companies like DOW and EK on their respective best and worst lists as they both have been discussed recently on VE.com. Dow was recently noted as one of the most attractive stocks within AFG’s Basic Materials sector (ranked 2nd most attractive sector amongst professional investors) in mid-august. Eastman Kodak (EK) is just one example of a torpedo AFG’s clients and ValueExpectations.com readers have avoided due to regularly being on AFG lists of stocks to avoid and also a model of poor Earnings Quality (high accruals) one way AFG filters out companies likely to underperform, and more likely to encounter a negative earnings surprise. EK has consistently had a poor EQ score according to AFG’s measure of accruals and continues to be ranked amongst the worst in its sector in Earnings Quality.

The Applied Finance Group’s (AFG’s) valuation technique helps investors identify and take advantage of mispriced securities in the market. One way investors can identify over or undervalued stocks is by using AFG’s Intrinsic Value Chart, which displays a company’s intrinsic value relative to its trading range and helps entry/exit points.

This easy to read chart identifies how far a stock’s trading range deviates from its intrinsic value (target price assuming immediate decay), which helps you recognize potentially mispriced stocks and pursue long and short opportunities. AFG’s Intrinsic Value Chart also contains a company’s Value Score (ranked valuation attractiveness), Economic Margin Change (expected improvement of economic profitability), and Accuracy (how well AFG’s default valuation has tracked the company) information. AFG’s valuation framework estimates a company’s equity value by subtracting debt and other liabilities from the total enterprise value. The total enterprise value is estimated by discounting projected future cash flows, utilizing analyst consensus, Economic Margin methodology, and the Decay concept which addresses the perpetuity bias in the traditional DCF model.

AFG’s Intrinsic Value Chart:

• Identifies entry/exit points

• Shows how well AFG has tracked the company (accuracy)

• Displays the trading range of the company each year through time (blue bars)

• Displays the end of year closing price (dash on blue bar)

• Displays AFG’s default intrinsic value (red dotted line)

How to Read this chart:

• The Blue Bars represent the high and low trading range for a stock for each calendar year.

• The red dotted line represents Applied Finance Group’s (AFG’s) historical Intrinsic Value through time.

• When the red line (Intrinsic Value) is above the blue bars (trading range) the company looks to be undervalued.

• When the red line (Intrinsic Value) is below the blue bars (trading range) the company looks to be overvalued.

Below is an example of AFG’s Intrinsic Value Chart and the important things to look for within the chart as well as two examples of undervalued companies according to AFG’s Intrinsic Value Chart as well as two overvalued and two fairly valued examples to provide a better understanding of what to look for when analyzing AFG’s Intrinsic Value Chart.

What to look for in AFG's Intrinsic Value Chart:

2 examples of undervalued companies (ABT,WAG) according to AFG's IV Chart:

2 examples of overvalued companies (BDK,MYL) according to AFG's IV Chart:

2 examples of fairly valued companies (CSCO,SNDK) according to AFG's IV Chart:

Click Here for an example of how we have used Intrinsic Value.

ValueExpectations.com has continued to provide investment ideas to help our readers make better informed investment decisions. In addition to finding Buy opportunities, VE.com also understands the importance of avoiding potential torpedoes given the current market volatility, so we have decided to provide a list of potential sell/short ideas from the S&P500 index (excluding Financials). These companies on our list look “At-Risk” of going bankrupt in the next 2 years according to the Altman Z-score (Z-Score), and look overvalued according to the AFG’s valuation framework.

Here is the list of 15 firms that you may want to avoid for your portfolio.

Overvalued S&P 500 Companies (Ex. Financials) with Poor Z-Scores (Altman Z-Score)

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.

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

George Putnam, editor of The Turnaround Letter, who is known for his value-oriented investment style, has recently shown interest in the Technology sector (usually targeted by growth-biased investors). Putnam’s interest was sparked when news came out that IBM was having talks with Sun Microsystems (JAVA), because he believes IBM is “one of the largest and best managed technology companies.” So when they begin to see value in other companies from their own sector, Putnam believes investors, including himself, would be wise to look for value there as well. After some research, Putnam Identified 10 stocks in the sector that are strongly positioned within their respective business niche, making them potentially rewarding investment ideas. ValueExpectations.com has taken Putnam’s list of companies and put them to the test. We analyzed each company using The Applied Finance Group’s (AFG’s) valuation model to identify which companies look attractive, and which ones do not. Also, using AFG’s corporate performance measurement (Economic Margin), we identified whether each company was in the top or bottom half in regards to expected improvement in economic profitability. As a final layer, we included the implied sales growth for each company to compare against the historical sales growth each has delivered over the past 5 years. Companies with the most realistic expectations for sales growth have proven to be more likely to out-perform than those companies with extremely high expectations. 

Putnam's Top 10 Technology Companies

* JDSU has a target price of $0 and its embedded expectations are significantly unrealistic.

AFG’s Value Expectations 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.

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 attractively priced using our valuation model. Lastly AFG evaluates how well companies run their business using its Management Quality score, eliminating companies that have management teams that destroy wealth.

The 9 firms listed below all meet AFG’s Sell Criteria. In addition, these companies all earn less than their cost of capital which means they earn a negative Economic Margin and only 3 (ERTS, MOLX, SWK) have a Z-Score (Altman Z-Score) that were not in the at-risk range. AFG has a track record of identifying winners and losers in the market.

If any of these firms are holdings in your portfolio, pay extra attention to these companies as they contain all of the characteristics of a bad investment and may be a potential torpedo lurking in your portfolio. AFG has proven successful since 1996 at identifying good companies as well as sell opportunities, providing a solid buy/sell spread.

Potential Torpedoes (S&P 500)

The Applied Finance Group (AFG) works with some of the most well respected investment firms in the U.S. to help them develop quantitative screening processes to identify a better fishing pond of companies to choose from for their portfolio holdings. However, picking winning investment opportunities isn’t the only value add AFG provides clients. They also develop quantitative strategies to quickly identify possible torpedoes lurking in your client or prospective client’s portfolio.

AFG’s quantitative process is centered on their proprietary Economic Margin Framework. The core of AFG’s quantitative process starts with evaluating corporate performance and the expected improvement relative to their peers, evaluating the valuation attractiveness of the company, and determining if a firm is following a wealth creating or wealth destroying strategy.

A brief description of those variables are 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 their peers.

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

When identifying torpedoes AFG looks for companies with the least valuation upside compared to their sector peers, below sector median expected Economic Margin change, and a management quality score that reflects a management team following a wealth destroying strategy.

These 16 S&P 500 companies are potential torpedoes that could be lurking in your portfolio. These companies all possess characteristics that make for a bad investment opportunity. If you own one of these companies and would like a more in-depth explanation of why they are considered a potential torpedo, please email support@afgltd.com.

S&P 500 Potential Torpedoes

*AFG’s Value Expectation interface 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 above table displays the implied future sales growth of these mining companies assuming their EBITDA margins and Asset turnovers stay at the 5 year median levels.

Mike Burdi of Applied Finance Group and Drew Morris of Great Numbers recently published a ranking of S&P 500 companies in CEO Magazine Using AFG's Wealth Creation Index. This measure of ranking CEO’s has been gaining traction and receiving publicity in national publications. Below are a few links to articles that have recently been published discussing our methods and results of identifying the biggest wealth creators and destroyers amongst the CEO’s of the nation’s largest companies.

An article written by Pittsburgh Post Gazette highlighting CEO Of Federated

An article from Planebuzz.com highlighting Southwest Airlines CEO

An article explaining the rankings with a link to the article by Directors Daily

An article explaining Economic Margin by New Jersey Star Ledger

The entire article posted on RealClearMarkets.com

The top and bottom CEO's from the rankings below:

Top 5 Companies based on CEO Rank along with Sales Growth Expectations

Bottom 5 Companies based on CEO Rank along with Sales Growth Expectations

Performance Rankings of the Top 50 and Bottom 50 Wealth Creating CEO's

According to Bespoke.com these S&P 500 stocks over $5 a share, are those that make the biggest advances/declines the day after reporting earnings since this bear market began in October 07’. Included in this table is the percentage of time these companies beat earnings and their average change on report day, along with their implied sales growth expectations. The implied sales growth measures what a company needs to grow sales at over the next 5 years to justify their current price. Comparing those expectations (VE Sales Growth) with what the company has delivered the past 5 years (5 year median sales growth) is a good way to tell if the current expectations are realistic for the company to meet or exceed. The lower the expectations relative to delivered sales growth, the more likely the company is to out-perform.

Today we look at a recent article in CEO magazine by Mike Burdi of The Applied Finance Group (AFG) and Drew Morris using AFG’s Wealth Creation Index to rank the top wealth creating and wealth destroying CEO’s within the S&P 500. After comparing the top 5 on each list by using AFG’s valuation techniques and comparing the sales growth expectations built-in to their current price (VE Sales Growth) with what the companies have achieved in the last five years (5 Year Median Sales Growth), it is easy to see that good companies do not always make good investments. AFG’s Value Score measures the stock’s attractiveness relative to the universe based on AFG’s Intrinsic Value Target Price. The score is ranked from 1-100 with 1 being the most overvalued and 100 being the most undervalued stock in the universe. VE sales growth captures the sales growth expectations priced-in to the stock to justify the current price.
Although the top 5 are well run companies, that does not automatically qualify them to be good investments. Depending on what the market has priced-in, and how likely the company can deliver that performance determines whether the company is a good investment or not. Many companies that have been beaten up and even those with wealth destroying CEO’s may be a good investment if very low expectations are priced-in and you feel the company can exceed their expectations.

Top 5 Wealth Creating CEO’s

*denotes company has only 3 years historical sales growth

Top 5 Wealth Destroying CEO’s

VE Sales Growth was calculated for these companies on 12/14/08