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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.

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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

AFG has a solid track record of identifying winners and losers in the market, check our buy/sell spreads since 1998.

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.

Below is a look at the YTD returns, valuation attractiveness and sales growth expectations of the two biggest and smallest companies in each sector within the S&P 500 (excluding financials). This link provides some insight into Applied Finance Group’s (AFG’s) valuation techniques. Also compare the expectations for sales growth to what the companies have delivered historically to see which stocks on this list are most likely to meet or exceed those expectations, and thus be more likely to out-perform.

 Biggest/Smallest Companies (Mkt Cap) By Sector S&P 500 (excluding financials)

*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.

With just a few trading days under our belt in 2009, these stocks have made the biggest moves so far according to Bespoke.com. Will these stocks continue the January hot/cold streak into the rest of the year or is this just a fluke. Only time will tell. We measured the implied sales growth priced-in to justify their current price (VE Sales Growth) against what these firms have delivered in sales growth for the past 5 years to see which companies have low or reasonable expectations. Companies with low expectations for sales growth priced-in relative to what they have been able to deliver are the ones that are more likely to out-perform.

VE Sales Growth calculated on 1-13-09

These lists exclude financials.

For the past 26 years Steven Halpern, editor of thestockadvisors.com has gone to well known and respected advisors once a year to find out which stocks they like for the coming year. Take a look at the list of stocks advisors liked in 2008 and their performance. Also listed are the picks of 75 prominent advisors for 2009 along with sales growth expectations for the companies to justify their current price (VE Sales Growth) which can be compared to what they have delivered in revenue growth over the past 5 years(5 Year Median Sales Growth). These companies are worth a look because they are in favor of well-respected advisors, but the companies that also have low expectations for sales growth priced-in to their stock are especially worthy of a close review.

2008 Blogger Picks Conservative and 2008 Performance

2008 Blogger Picks Speculative and 2008 Performance

Blogger Picks for 2009 and Sales Expectations

* denotes # of years historical sales numbers available

VE Sales Growth calculated for these firms on 1-6-09