BIG

In yesterday’s article on ValueExpectations.com we discussed the solid month of February for the retail segment as most retailers posted better-than-expected same store sales growth. The question we posed was whether or not this was sustainable growth, or just a small temporary boost caused by easy comparisons and tax refunds. The conclusion that we come to is that it is not the time to rush out and buy retail companies but to proceed with caution as the “easy money has likely been made in the retail sector.” However if you are an investor that is actively pursuing positions from within the retail industry, we have provided a few retail names that look attractive (6) and unattractive (6) based on criteria that The Applied Finance Group uses in its stock selection process.

A list of the 25 top performing stocks of 2010 (ex. Financials) from within the S&P 500 index. We have taken the top 25 companies from 2010 and provided our readers 3 attractive and 5 unattractive stocks from this list based on their valuation attractiveness relative to sector peers and overall investment opportunity using key criteria that The Applied Finance Group (AFG) uses in its stock selection process including corporate performance, management quality and earnings quality to see which of the top performers still look to have upside and which look like they have run out of room to run.

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.

AFG Ticker Name AFG Sector Investment Opportunity 12 Attractive Consumer Companies (S&P 500) (NYSE:ARO) AEROPOSTALE INC Consumer Services Attractive (NASDAQ:ROST) ROSS STORES INC Consumer Services Attractive (NYSE:TJX) TJX COMPANIES INC THE Consumer Services Attractive (NASDAQ:DLTR) DOLLAR TREE INC Consumer Services Attractive (NYSE:KSS) KOHL'S CORP Consumer Services Attractive (NYSE:FDO) FAMILY DOLLAR STORES INC Consumer Services Attractive (NYSE:BIG) BIG LOTS INC Consumer Services Attractive (NYSE:GPS) GAP INC THE Consumer Services Attractive (NYSE:GME)  GAMESTOP CORP CL A Consumer Services Attractive (NYSE:WMT)  WAL-MART STORES INC Consumer Services Attractive (NYSE:BBY)  BEST BUY CO INC Consumer Services Attractive (NYSE:COH) COACH INC Consumer Non Durable Attractive

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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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

Fidelity has a fund called the Low Priced Stock fund that only contains stocks with a price of below $35 a share which has been successful in the past. Following a similar strategy ValueExpectations.com has published 2 articles containing attractive stocks under $35 as a starting place for investor’s looking for potential investment opportunities. The first low priced stock strategy blog outpaced the S&P 500 by over 58% since release in February the second article released in June has slightly underperformed the S&P 500 by -1.26%. Since this strategy has been well received by VE readers we decided to provide a new list of attractive stocks using the same strategy.  Below is a list of S&P500 stocks that are currently trading under $35 a share that have passed through AFG’s investment criteria which looks for companies ranked in the top half of their sector in valuation, economic performance, management quality and earnings quality. All of the companies listed scored well in all of the required variables for AFG to deem a company attractive and backtests will show that all of these variables deliver a significant spread in performance between those that AFG sees as unattractive vs. those that look attractive from an AFG standpoint.  To analyze your holdings using AFG’s research process click here.

AFG Rank within Sector Ticker Name Sector Investment Opportunity Valuation Signal EM Change Signal   (NYSE: BMY) BRISTOL-MYERS SQUIBB CO Health Attractive Attractive Positive (NYSE: HRS) HARRIS CORP Technology Attractive Attractive Positive (NYSE: AEP) AMERICAN ELECTRIC POWER Utilities Attractive Attractive Positive (NYSE: VZ) VERIZON COMMUNICATIONS Technology Attractive Attractive Positive (NASDAQ:ERTS)  ELECTRONIC ARTS INC Technology Attractive Attractive Positive (NYSE:STZ)  CONSTELLATION BRANDS INC Consumer Non Durable Attractive Attractive Positive (NYSE:BSX)  BOSTON SCIENTIFIC CORP Health Attractive Attractive Positive (NYSE:SEE)  SEALED AIR CORP Basic Material Attractive Attractive Positive (NYSE:CAG) CONAGRA FOODS Consumer Non Durable Attractive Attractive Positive (NYSE:BIG) BIG LOTS INC Consumer Services Attractive Attractive Positive

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.

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.

Exchange/Ticker     AFG Rank within Sector Name Sector Investment Opportunity Valuation Signal EM Change Signal Attractive Consumer Services Companies - S&P 500 (NYSE: DRI) DARDEN RESTAURANTS Consumer Services Attractive Attractive Positive (NYSE: KR) KROGER CO THE Consumer Services Attractive Attractive Positive (NYSE: TJX) TJX COMPANIES INC THE Consumer Services Attractive Attractive Positive (NYSE: MCD) MCDONALD'S CORP Consumer Services Attractive Attractive Positive (NYSE: YUM) YUM! BRANDS INC Consumer Services Attractive Attractive Positive (NYSE: CVS) CVS CAREMARK CORP Consumer Services Attractive Attractive Positive (NYSE: FDO) FAMILY DOLLAR STORES INC Consumer Services Attractive Attractive Positive (NYSE: BIG) BIG LOTS INC Consumer Services Attractive Attractive Positive (NYSE: RSH) RADIOSHACK CORP Consumer Services Attractive Fair Positive (NYSE: WMT) WAL-MART STORES INC Consumer Services Attractive Attractive Positive

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.

 

As the first 100 days of the new administration have come and gone, portfolio managers and analysts are searching through the market to see which stocks, industries, and sectors will gain from new policy and which ones are potential torpedoes in their portfolio. In AFG’s Monthly Market Review we have highlighted some of the focus of the new administration and how it can affect decisions as an investor, and we continue to search through the market in the hope of identifying which companies warrant their performance and which ones look to be unattractive from a valuation standpoint. The companies within the Financial sector have moved for reasons other than valuation, and will not be evaluated from a valuation perspective but it is interesting to see which companies have done the best and worst given the recent market shift.

Below is a comparison of the performance of the market with the last four presidents - we understand that each president walked into a different economic environment, but it is interesting to see how each one faired their first 100 days. The key will be how the market does over the long haul, especially given the significant policy changes and challenges the markets face over the course of the next year.

S&P 500 Reactions to Obama's First 100 Days

Event Key Of Obama's First 100 Days

How Obama's First 100 Days Compare to Last 3 U.S. President's (S&P 500)

S&P 500 Companies With Best/Worst Returns During Obama's First 100 Days

Valuation Attractiveness of Top/Bottom 10 Companies in Obama's First 100 Days (Ex. Financials)

Valuation Model – Using AFG’s modified discounted cash flow model to measure the intrinsic value of a firm compared to its peers. AFG's Value Score - A score which represents the ranked percent to target (deviation between stock’s current trading price and AFG’s current default target price) or attractiveness (upside) relative to the universe. A Value Score of 100 is the most undervalued and 0 is the most overvalued company in the universe.

With the first quarter of 2009 winding down, ValueExpectations.com has compiled a list of the best and worst performing stocks thus far in 2009 (excluding financials). It is not surprising for us to see two companies on the top performer list (S and MYL) that also appeared on our list at the end of January, or three bottom performing companies (ODP, TXT and MTW) still remaining on the bottom performer list over a month and a half later. We published an article in early February highlighting the top and bottom performers for the month of January and posed the question “Is the January Effect effective?”

 

Top 10 S&P 500 Companies (YTD 2009)

 

Bottom 10 S&P 500 Companies (YTD 2009)

 

Our conclusion: Looking at the YTD returns for the companies in our January effect article's top and bottom lists, we notice that there is a huge spread. January’s top performers have earned an average return of 4.66% YTD compared to January’s bottom performers’ average YTD return of -57.15%. This pretty compelling spread suggests that the January effect may be something investors want to pay closer attention to next year and it may even be helpful for the remainder of 2009.

 

 

*AFG’s Value Expectation allows us to understand the imbedded Sales Growth, EBITDA Margins, 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 displays the implied future sales growth of companies assuming their EBITDA margins and Asset turnover stay constant at the company's historical 5 year median.