ABT

It’s that time of the year again … a time when most people indulge in expressions of love and affection for others. While some are in, or looking to be in, long-term relationships, others are looking for short-term romance. Similarly, some investors look for long-term investment opportunities, while others look for short-term gains. This blog will look at the medical device industry to find companies that have exposure to heart-related products and are making good strategic decisions. We wrote previously about how important it is to understand Management Quality with two important variables: Economic Management and Asset Growth. The Management Quality Quadrant below looks at a few companies that market their medical devices to treat irregular heartbeats, repair heart valves, and otherwise help patients with serious heart conditions.

The Applied Finance Group’s (AFG’s) valuation techniques help 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.

To stay updated on companies AFG believes are attractive investment opportunities register for ValueExpectations.com It's Fast and Free!

The example we have provided is Abbott Laboratories (NYSE:ABT), a company that currently looks undervalued according to AFG’s default valuation model. An important fact to note is that AFG has shown it tracks Abbott Laboratories (NYSE:ABT) well (high accuracy score of 98). Also, Abbott Laboratories has a current AFG Value Score of 84, meaning the company ranks in the top 84th percentile of companies in the AFG universe in valuation attractiveness. ABT's expected acquisition of the pharmaceutical portion of Solvay S.A. in Q1 of 2010 will more than likely affect its valuation once completed, but currently, ABT looks attractive.

 

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.

To stay updated on companies AFG believes are attractive investment opportunities register for ValueExpectations.com It's Fast and Free!

On March 9th 2009, the S&P 500 hit its low mark of the year of 666.79. Since March the market has rallied up to 1,068.78 as of the close on September 16, 2009 and we thought it timely to analyze the companies that have made the biggest gains and losses since the low and provide some insights on how we view the 10 biggest gainers and losers in the index going forward. All of the biggest movers have been ranked based on attractiveness according to The Applied Finance Group’s (AFG’s) investment criteria and valuation model. The companies with the most attractive valuations and positive Economic Margin (AFG’s measure of corporate performance) movement have proven to be more likely to outperform those companies that look unattractive according to AFG investment criteria and that look expensive within AFG’s valuation model.

The list below contains the companies that have experienced the biggest price movements in the S&P 500 since the March 9th low and how each of these companies measure up going forward, according to AFG’s investment criteria and valuation model. Companies that look attractive according to AFG’s valuation model along with improving Economic Margins have proven through vigorous back-tests to identify the company’s most likely to outperform their benchmark.

AFG Investment Opportunity Rank within Sector % Move Since March 9th Low Ticker Name Sector Valuation Signal EM Change Signal S&P 500 Biggest Gainers Since March 9th Low (ex. Financials) (NYSE:TXT)  TEXTRON INC Capital Goods Unattractive Unattractive Negative 416% (NASDAQ:WYNN)  WYNN RESORTS LTD Consumer Services Unattractive Unattractive Negative 366% (NYSE:GCI) GANNETT CO INC Consumer Services Unattractive Unattractive Negative 365% (NYSE:ODP) OFFICE DEPOT INC Consumer Services Fair Unattractive Positive 969% (NYSE:GT)  GOODYEAR TIRE & RUBBER Consumer Durable Fair Unattractive Positive 342% (NYSE:F) FORD MOTOR CO Consumer Durable Fair Unattractive Positive 314% (NYSE:THC)  TENET HEALTHCARE CORP Health Fair Unattractive Fair 538% (NYSE:IP) INTERNATIONAL PAPER CO Basic Material Fair Unattractive Fair 467% (NYSE:WYN) WYNDHAM WORLDWIDE CORP Consumer Services Fair Fair Negative 422% (NYSE:DOW) DOW CHEMICAL CO THE Basic Material Fair Attractive Positive 308% S&P 500 Biggest Losers Since March 9th Low (ex. Financials) (NYSE:FDO)  FAMILY DOLLAR STORES INC Consumer Services Attractive Attractive Positive -12% (NASDAQ:CEPH) CEPHALON INC Health Attractive Attractive Positive -6% (NYSE:ABT) ABBOTT LABORATORIES Health Attractive Attractive Positive 1% (NYSE:DF) DEAN FOODS Consumer Non Durable Fair Attractive Positive -5% (NYSE:AZO)  AUTOZONE INC Consumer Services Fair Attractive Positive -2% (NYSE:PCS) METROPCS COMMUNICATIONS Technology Fair Attractive Fair -34% (NYSE:CAH) CARDINAL HEALTH INC Health Fair Attractive Negative -8% (NYSE:SUN)  SUNOCO INC Energy and Extraction Fair Attractive Negative 1% (NYSE:HES)  HESS CORP Energy and Extraction Fair Attractive Negative 1% (NYSE:HRB)  H&R BLOCK INC Consumer Services Fair Fair Positive -2%

 

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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.

In recent weeks we have written several blogs (S&P 500 sector stock watch, Attractive stocks under $35, with potential investment opportunities, Solid S&P Value Companies, Cheapest Stocks In the S&P 500), discussing investment opportunities within the S&P 500. These stocks ideas all had favorable scores under The Applied Finance Group's (AFG’s) investment criteria, which includes economic performance, valuation, earnings quality and management’s ability to create shareholder wealth, among other criteria.

Another way that AFG identifies potentially attractive investments is through the use of its Value Expectations interface, which helps investors get a better understanding of the expectations embedded into stock prices. This interface allows us to understand the Sales Growth, EBITDA Margin, and Asset Turnover 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 below displays the implied future Sales Growth (“Priced-in Sales Growth) of the companies we have recently recommended in our recent blogs, assuming their EBITDA Margins and Asset Turnovers stay at 5-year median levels.

Company Descriptors Sales Growth   Ebitda   Asset Turnover Exchange/Ticker Name Sector "Priced-in" Sales Growth 5 Year Median LFY   5 Year Median LFY   5 Year Median LFY (NYSE:ABT) ABBOTT LABORATORIES Health 6.32% 13.51% 13.94%   25.34% 24.83%   0.69 0.70 (NYSE:AEP)  AMERICAN ELECTRIC POWER Utilities 9.53% 4.22% 7.92%   27.14% 28.82%   0.33 0.32 (NYSE:AES)  AES CORP THE Utilities -4.73% 12.73% 18.27%   34.66% 29.23%   0.39 0.46 (NASDAQ:APOL) APOLLO GROUP INC CL A Miscellaneous -2.48% 15.31% 15.31%   28.46% 25.59%   1.71 1.69 (NYSE:AZO) AUTOZONE INC Consumer Services -8.92% 3.72% 5.72%   19.59% 19.72%   1.33 1.24 (NYSE:BIG)  BIG LOTS INC Consumer Services 15.47% 1.25% -0.24%   5.44% 6.86%   2.74 3.24 (NYSE:BMY)  BRISTOL-MYERS SQUIBB CO Health -1.23% -0.89% 6.46%   24.98% 22.84%   0.70 0.70 (NYSE:BSX)  BOSTON SCIENTIFIC CORP Health 5.14% 11.72% -3.67%   28.70% 27.68%   0.45 0.30 (NYSE:CAG)  CONAGRA FOODS Consumer Non Durable 23.23% 0.31% 9.70%   11.31% 10.74%   1.02 1.15 (NASDAQ:CEPH)  CEPHALON INC Health -5.73% 19.35% 11.40%   26.65% 26.37%   0.47 0.62 (NYSE:DNB) DUN & BRADSTREET CORP Consumer Services -18.53% 4.43% 7.95%   30.41% 32.09%   0.93 1.09 (NYSE:DPS)  DR PEPPER SNAPPLE GRP Consumer Non Durable 15.11% 10.36% -0.66%   20.60% 20.60%   0.55 0.66 (NYSE:DRI)  DARDEN RESTAURANTS Consumer Services -1.78% 8.38% 8.92%   13.02% 12.80%   1.80 1.44 (NASDAQ:ERTS) ELECTRONIC ARTS INC Technology 2.34% 5.81% 14.93%   10.99% -2.24%   0.69 0.90 (NYSE:FIS) FIDELITY NATIONAL INFO Consumer Services -7.42% 7.47% -27.57%   23.50% 26.76%   0.83 0.46 (NASDAQ:FISV)  FISERV INC Miscellaneous 14.41% 11.94% 20.83%   22.99% 23.53%   0.48 0.51 (NYSE:HAS)  HASBRO INC Consumer Durable 2.47% 3.01% 4.79%   16.31% 17.62%   1.00 1.27 (NYSE:HRS)  HARRIS CORP Technology -1.48% 19.14% -5.76%   15.24% 15.96%   1.13 1.12 (NYSE:KR)  KROGER CO THE Consumer Services 4.51% 7.30% 8.21%   5.31% 5.21%   3.04 3.27 (NYSE:LO)  LORILLARD INC Consumer Non Durable -5.09% 5.62% 5.92%   33.08% 32.55%   1.44 1.81 (NYSE:NOC)  NORTHROP GRUMMAN CORP Capital Goods 1.10% 5.84% 5.84%   9.99% 11.63%   0.92 1.12 (NYSE:PEG)  PUBLIC SVC ENTPRS GROUP Utilities 7.72% 3.65% 3.65%   24.57% 30.23%   0.42 0.46 (NYSE:PFE)  PFIZER INC Health -4.75% -0.25% -0.25%   40.22% 32.09%   0.42 0.43 (NYSE:PM) PHILIP MORRIS INTL INC Consumer Non Durable 18.90% -10.87% -53.35%   18.26% 17.37%   1.78 0.78 (NYSE:RDC)  ROWAN COMPANIES INC Capital Goods -20.68% 38.68% 5.62%   33.16% 38.76%   0.40 0.49 (NYSE:S)  SPRINT NEXTEL CORP Technology -13.65% 18.30% -11.24%   29.59% 25.61%   0.62 0.61 (NYSE:SEE)  SEALED AIR CORP Basic Material -3.95% 7.47% 4.13%   16.64% 15.47%   0.85 0.97 (NYSE:STZ)   CONSTELLATION BRANDS INC Consumer Non Durable 23.76% 12.62% -3.14%   17.06% 16.97%   0.54 0.45 (NASDAQ:SYMC)  SYMANTEC CORP Technology 6.36% 25.49% 4.69%   30.39% 27.15%   0.37 0.58 (NYSE:TAP)  MOLSON COORS BREWING CLB Consumer Non Durable 14.61% 6.14% -22.88%   17.95% 17.83%   0.49 0.46 (NYSE:TMO)  THERMO FISHER SCIENTIFIC Health 7.08% 19.36% 7.71%   14.90% 18.20%   0.56 0.50 (NYSE:TSO)  TESORO CORPORATION Energy and Extraction -47.31% 29.18% 29.18%   6.76% 6.19%   3.04 3.81 (NYSE:VZ) VERIZON COMMUNICATIONS Technology 2.94% 5.37% 4.16%   32.18% 32.05%   0.46 0.48 (NYSE:WAT)  WATERS CORP Capital Goods 5.94% 10.53% 6.93%   28.15% 27.30%   0.80 0.97

The Applied Finance Group’s (AFG’s) goal is to help its clients pick the best stocks in any index, sector or market cap through the use of its Economic Margin (EM) methodology, valuation techniques, and ability to evaluate management’s capability to create shareholder wealth. The EM methodology helps investors understand the true economic profitability a company has earned by making adjustments to correct for some of the common distortions in traditional GAAP accounting practices. The valuation model AFG has built has proven through time to identify mis-priced securities which helps its clients take advantage of those mis-pricings and outperform their chosen benchmark (most commonly the S&P 500).

Below is a list of companies from the S&P 500, one from each major AFG sector (Excluding Financials), that meet AFG’s criteria to be considered as an attractive investment opportunity based on expected improvement in EMs, attractive valuation and a management team following a wealth creating strategy.

AFG Rank within Sector Ticker Name Sector Investment Opportunity Valuation Signal EM Change Signal Attractive  S&P 500 Companies (NYSE:WAT) WATERS CORP Capital Goods Attractive Attractive Positive (NYSE:HAS)  HASBRO INC Consumer Durable Attractive Attractive Positive (NYSE:LO)  LORILLARD INC Consumer Non Durable Attractive Attractive Positive (NYSE:DRI)  DARDEN RESTAURANTS Consumer Services Attractive Attractive Positive (NYSE:ABT) ABBOTT LABORATORIES Health Attractive Attractive Positive (NASDAQ:FISV)  FISERV INC Miscellaneous Attractive Attractive Positive (NASDAQ:SYMC)  SYMANTEC CORP Technology Attractive Attractive Positive

Every year Fortune releases a list of the 40 best companies to invest in now to retire on. This long-term portfolio is designed to protect your hard-earned nest-egg as you approach retirement.

Last year Fortune’s portfolio of 40 best stocks to retire on returned -23.07% from 6-20-08 to 6-16-09, relative to the -30.8% returned by the S&P500 during the same time period. This year they are replacing 23 stocks to form the new portfolio.

Provided below are the 40 stocks recommended by Fortune as the best stocks to retire on in 2009 and our outlook of these companies from a valuation perspective based on The Applied Finance Group’s valuation model.

 Fortune's 40 Best Stocks to Retire On - 2009

Related Stock Article:
Is Apple a Buy Hold or Sell?, Click Here to View

Fortune released a list of 40 companies in June 2008 that they labeled as the 40 best stocks to retire on. Although ValueExpectations.com’s research is focused on long-term investing, we believe reviewing companies on a ongoing basis helps to avoid potential pitfalls with bad investments and allows one to take advantage of companies that might be mispriced. For this reason we have ranked all companies in the Fortune 40 portfolio based on Valuation Attractiveness.

Good companies don’t always make good investments! If you believe this is a list of quality companies then that is a wonderful start. But understanding what you are paying for those companies is equally important. Few would argue that Mercedes Benz produces an excellent engineered vehicle and a quality product. However, if that Mercedes Benz cost $1,000,000, it may be a great vehicle, but not necessarily a good price.

As a review of the performance of this list since release, Fortune’s portfolio has returned an average of -28.64% since its release which is about 6.3% spread above what the S&P 500 delivered on average during the same time period. Although this portfolio did outperform the S&P 500, had you invested in these 40 companies in equal parts on the date of release, your $100,000 retirement nest egg would now be worth somewhere around $70,000.

Fortune 40 Companies To Retire On

 

AFG's Valuation Model – Using AFG’s modified discounted cash flow model to measure the intrinsic value of a firm compared to its peers.

Since March 9, 2009, the S&P 500 experienced quite a recovery, going from 676 to 813, or just over a 17% rebound. To put that into perspective, the market historically delivered 8% average annual returns. In the table below we provide a list of the top and bottom 10 performers since the March 9th rebound began, to give you an idea of who the new Bulls and Bears are. In the list you will find each company’s attractiveness from a valuation standpoint, as well as an analysis of sales growth expectations imbedded in these companies’ stock prices. Compare the expectations for sales growth to what they 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. This list contains companies from the S&P 500 excluding all financial companies.

 

Top & Bottom Returns (S&P 500 excluding financials) Since March 9, 2009

 

*Scott Goto Arts

 

*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.

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.

 

Related: Read our Economic Margin white paper which was published in the book: Value-Based Metrics: Foundations and Practice Edited by: Frank J. Fabozzi and James L. Grant Pages 157 – 178: Click Here

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

According to Forbes.com, Cramer and a few other financial blog-sites the following qualities are usually found in stocks that do well in economic downturns of extended time periods.

• Consumer necessities
• Ability to pay a dividend
• Ability to add employees as other firms cut back
• Productivity increases as market goes down
• Healthcare stocks
• Legacy Companies – high quality company with long business history
• Involved in Military
• Oil industry
• Infrastructure
• Companies that sell used goods
• Generic products
• Overseas exposure

The following companies all have one or more of the above qualities to help them survive and perform well in an economic downturn. This table provides the implied 5 year sales growth priced-in to the stock to justify its current price along with the 5 year median achieved sales growth. Compare the revenue growth priced-in to what the company has been able to deliver in the past 5 years to see if the expectations are reasonable enough for the company to meet. Companies with reasonable expectations compared to what they have achieved are the most likely companies on the list to out-perform.

Stocks with Recession Resistant Qualities & Sales Growth Expectations