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AFG’s Custom Screening Process Step 1 – Identifying Undervalued Companies Including Procter & Gamble Co. (NYSE:PG)
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Attractive Mega-Cap Stocks To Watch – Including Pfizer Inc. (NYSE:PFE) and Google Inc. (NASDAQ:GOOG)
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What Blockbuster Video Can Teach Us About Economics
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It's Investment Banking: Why Wall Street Pay Is High - Including Wal-Mart Stores (NYSE:WMT)
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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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12 Consumer Stocks For The Holidays - Including Kohl’s Corp. (NYSE:KSS)
With the biggest shopping season of the year just around the corner, we thought it would be timely to highlight some consumer sector companies that look attractive according to The Applied Finance Group’s (AFG’s) criteria for investment opportunity attractiveness, as they are in line to benefit from the upcoming seasonal spending patterns. The list of companies we have provided look the most attractive within the AFG consumer sector in terms of valuation attractiveness, economic performance, and overall investment attractiveness relative to their peers.
One of the companies that we feel particularly confident in is the retailer Kohl’s (KSS) which is currently a holding in The AFG 50, (a model portfolio of 50 large cap stocks designed to help Portfolio Managers save time, make more informed investment decisions, and outperform their benchmark). We are confident about Kohl’s competitiveness because they have a strong cash flow, strong execution, and have been outperforming their competition.
Going into this holiday season, consumers will most likely remain thrifty due to the overriding economic conditions, although their confidence levels have improved so far this year. They will search hard for values, being mindful of budget. We continue to believe Kohl’s will remain one of the most successful retailers in this country, as it strives to and succeeds in providing value to consumers with freshness and relevance of its merchandize.
The complete list of consumer stocks we have provided below, which includes the highlighted Kohl’s, are the companies AFG believes are the most likely to outperform. Companies that AFG identifies as having an attractive valuation, improving Economic Margins (AFG’s corporate performance metric) and an attractive investment opportunity signal have proven over time to outperform those companies with unattractive valuations, declining Economic Margins, and unattractive investment opportunity signal.
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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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Analyzing The Oracle - Berkshire Hathaway (NYSE:BRK.A) Holdings and Analysis - Including Wal-Mart (NYSE:WMT)
The Oracle of Omaha Warren Buffett is generally viewed as the most respected and successful investor in history, and many of our value-oriented readers follow the movements and purchases of Buffett rather closely and for good reason. Berkshire Hathaway, a conglomerate holding company, which Buffett built from a textile company into a major corporation, has averaged a 20.3% compounded annual gain in per-share book value from 1965-2008. There is no doubt about the success Buffett has achieved over the years, and there has even been a recent study done that shows an investor could have earned over 14% returns a year had they purchased each Buffett stock, a month after his investment company disclosed ownership.
We thought it would be an interesting story to show how Buffett’s holdings would rank according to The Applied Finance Group’s (AFG’s) valuation model and Economic Margin Methodology. The companies we believe look the most attractive and that investors should pay the most attention to when searching for long investment opportunities are the companies that have both an attractive default AFG valuation and are expected to improve their Economic Margins at a greater rate than their sector peers.
AFG's track record of identifying winners and losers has proven that companies AFG identifies as undervalued are more likely to outperform, than those AFG ranks as overvalued, and the same holds true for companies with expected improvements in EMs vs. expected declines. The Economic Margin methodology adjusts for common distortions in GAAP accounting practices and helps investors to understand the true economic profitability a company earns above its cost of capital. By understanding the true economic profitability a company earns and by gaining a firm grasp on the expectations embedded in security prices, investors can come to a more refined intrinsic value for a company and thus put themselves in a better position to outperform.
Below is a list of Berkshire Hathaway’s current holdings (excluding Financials) ranked by valuation attractiveness, and followed by expected change in economic margins.
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Consumer Confidence On The Rise - Attractive Consumer Stocks Including Walmart (WMT) McDonalds (MCD) and CVS Caremark (CVS)
The Consumer Confidence Index jumped higher in August than was expected and is at its highest point since the current recession began. The Consumer Confidence Index rose to 51.4 which beat expectations yet is still way below 90, the minimum level to indicate a healthy economy, but the confidence level is headed in the right direction. Being that consumers seem to be gaining confidence in an economic recovery, some consumer stocks may be returning to the forefront of some investor’s minds so we decided to put together a list of attractive consumer companies from the S&P 500.
All of the companies listed have an attractive valuation and are expected to improve their Economic Margins at a greater rate than their sector peers. All of these companies are also rated as attractive according to AFG’s default investment criteria which factors in valuation, economic performance and management quality.
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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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Berkshire Hathaway's Holdings
With Berkshire Hathaway’s annual meeting just behind us, we thought it would be interesting to provide an analysis of the Oracle of Omaha’s companies (ex. Financials) to give you a better idea of their valuation attractiveness. The companies that rank highest on valuation should be more likely to outperform going forward and could represent an attractive investment opportunity.
Year to date Mr. Buffet’s portfolio has delivered an average return of 5.18% compared to the 12.93% delivered by the S&P 500 Index (as of May 8, 2009). In the future we will measure the performance of each of the three groups of stocks we now label as Attractive, Fairly Valued, and Unattractive, in order to see what type of spreads are achieved between them.
Berkshire Hathaway's Holdings (ex. Financials) Ranked By Valuation Attractiveness
If you want to learn more about AFG's Valuation methodology, click here.
Size Matters?
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.
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USA Today's Investment Pros - Picks For 2009
As 2009 approached, USA Today’s market experts gave us their insights/predictions on what they thought would happen in the upcoming year. Even as the world has changed dramatically since this list was released in December 2008, these “guru’s” picks are worthy of some attention to see how their predictions did against the overall Russell 1000 index so far this year. We ran their list through Applied Finance Group’s (AFG’s) set of screens that identify potential investment opportunities to see which companies they recommended met AFG’s criteria. Below is each expert’s picks and performance along with the performance of the Russell 1000 to benchmark against. The 6 companies highlighted (TAP, CSCO, WMT, PG, ABT, JPM) were the companies that met AFG's Buy Criteria (described below) for a potential investment opportunity and the rest failed to make the grade.
USA Today's Investment Pros - Picks For 2009
USA Today's Investment Pros Picks Vs. Russell 1000 - December 12, 2008 to March 17, 2009
A brief description of The Applied Finance Group's Buy Criteria variables is 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 it's peers.
Management Quality – Assess management’s ability to make wealth creating decisions.
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Most Admired Companies, Most Investment Worthy?
Fortune magazine recently put out an article listing the most admired companies in the world. We took the top 50 firms (excluding Financials, and companies not traded in the US) on their list and put them through Applied Finance Group's quantitative recommendation framework. Just because these firms are among the most admired companies in the world does not qualify them as the most attractive investment. Being among the most admired is an honor and means you must be doing something right, but might not necessarily mean the share price is currently attractive.
The following articles which we have posted in the past on ValueExpectations.com will give you a better understanding of what it takes for management to create wealth, understand Management Quality, and see how EPS alone falls short in estimating a company’s value. There are two main characteristics a company must have in order to be a good investment opportunity: (1) the company needs to be a strong economic performer, (2) the company should be attractively priced. Many people admired the DeLorean, but it was neither a good performing car nor a good priced car. Below we reveal a few "DeLoreans" after looking under the hood.
Top 50 Most Admired Companies According to Fortune
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ValueExpectations.com Vs. The Oracle
Recently Berkshire Hathaway released a letter to its shareholders, which outlined last year’s activities and provided insights on their outlook going forward with an overview of the company's major holdings. Below is a list of Berkshire's major holdings (excluding Financials) and ValueExpectations.com’s recommendations for these companies.
We will revisit this later in the year to see how ValueExpectations.com's recommendations fared.
Applied Finance Group's quantitative process is centered on their proprietary Economic Margin Framework. The core of AFG’s quantitative process starts with evaluating a company's corporate performance and the expected improvement on a relative basis, assessing 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 is 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 it's peers.
Management Quality – Assess management’s ability to make wealth creating decisions.
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Biggest Market Cap Companies - Russell 1000 & Russell 2000
The Russell 1000 Index has lost 44% over the past year and is down 14% year to date. Similarly, the Russell 2000 Index is down 42% for the past 12 months and lost investors 18% since the beginning of this year. With both of these indexes down substantially recently by about the same amount, are large caps more attractive than small caps?
Percent to Target Charts: This graph shows the Percent to Target Current 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.
Small Universe: Companies in the AFG universe that have a market cap less than $300 million and EPS consensus estimates are available.
This chart illustrates that the median Small Cap company is currently overvalued, relative to the market. Over the past 6 years, small Caps have been trading at a premium to their historic valuation.
Large Universe: Companies in the AFG universe that have a market cap greater than $2 billion and EPS consensus estimates are available.
This chart illustrates that the median Large Cap company is currently undervalued, relative to the market. Large Caps have been trading at a discount to their historic valuation, indicating a potentially attractive opportunity.
Following is a list of the biggest 10 companies (determined by market cap) in the Russell 1000 and Russell 2000. AFG’s Value Expectations interface, which solves for implied sales growth embedded in a stock price (VE Sales Growth), allows us to understand the embedded 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. An undervalued company is more likely to outperform those companies with high expectations relative to what they have delivered historically. The tables below display the implied future sales growth of these companies assuming their EBITDA margins and Asset turnovers stay at their 5-year median levels.
Conclusion:
Both the percent to target charts and VE analysis show that large caps look more attractive than small cap stocks. The large cap stocks on the list have lower expectations for implied sales growth and the overall universe is currently undervalued.
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EPS Increased.....Company Underperformed?
A common buzz for investors is learning that their holdings have increased earnings per share. EPS growth is thrown around Wall Street circles, analyst discussions, corporate conference calls and investment talk shows as if it is the central focus for companies. What professional investors know and many misrepresent, is that earnings are important but not a complete driver for the true cash flows a company is generating.
Most investors agree that the value of a firm is the present value of its future cash flows. For the typical industrial firm, EPS only represents approximatley 50% of cash flow. If you believe that the value of a firm is the sum of its future cash flows, using EPS alone to value a firm can cause you to miss 50% of the cash flows.
The analysis we use at ValueExpectations.com has a broader focus that emcompasses all cash flows and moves beyond EPS. While capturing the true cash flow the entire firm is generating and addressing their cost of capital making several other adjustments along the way, it provides a more economic outlook for a company. We call this analysis Economic Margin:
It is not uncommon for companies to grow EPS while having declining EM’s. This occurs when the cost for the investment required to yield the increasing EPS is more than the cash flow generated from the investment.
Unlike traditional measures, EMs consider the “profitability” of EPS growth, eliminate accounting distortions, and are comparable across time and industry. By analyzing a company’s EMs through time, investors gain a more accurate account of levels and changes in a company’s current profitability and value.
If earnings are a true proxy for performance, there should be a correlation between a company growing earnings and its price to earnings ratio. As a surprise to many investors, there is actually little to no correlation between earnings growth and price to earnings ratios (left chart below).
Because of changes in depreciation, inventory methodologies, write-offs, asset mix, growth and inflation, accounting data changes for non-economic reasons. Therefore, accounting data can give the wrong buy/hold/sell indication. This is illustrated by the poor link between traditional accounting measures and stock prices (left chart below). Economic Margins (EMs) are systematically calculated for over 8,000 U.S companies. The resulting values have a much stronger link to stock prices than traditional accounting data provides (right chart below). As a result, portfolio managers and analysts have a much more accurate starting point for their analysis.
Below are a few examples of companies that have done an exceptional job growing EPS but have fail to improve their economic profitability resulting in underperformance. Click here to read a related article: AFG Basic Valuation Concepts
Click here to read a related article: AFG Basic Valuation Concepts
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