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Every year The Applied Finance Group (AFG) gathers a group of its clients in Las Vegas for its Research Summit that provides insight into how to get the most out of AFG's research and investment tools. At the same time AFG clients experience insightful speakers and leave with actionable ideas (from AFG analyst team) to trade on upon return to the office. When this large group of investment managers gather they are asked to provide their views/opinions/predictions on several topics that will have an impact on the markets and economy over the next year. We conduct this survey in order to gauge investor sentiment towards the overall market and economy as well provide our clients insight into what their peers are thinking. One of the questions that we felt would be helpful to see answered is which sectors investors predict to be most attractive over the next 12 months (S&P 500). The two favorite sectors to invest in over the next year are healthcare and energy.

Investing in dividend paying stocks offers a few benefits such as a hedging against inflation, dividend payers also provide a steady cash stream in bear market periods and serve as a way to add some cash to a portfolio without moving in and out of positions. During tough market environments we recommend buying safe, well managed, attractively-priced dividend stocks as opposed to fleeing the equity markets to the “safety” of the realm of fixed-income. This strategy serves as a way to “stay in the game” if the market does experience a run-up, while at the same time protecting your portfolio from a long-term bear market. Utilizing The Applied Finance Group’s backtest system, we ran a strategy of investing only in companies with a market capitalization of greater than US$ 1 Billion and a dividend yield above 3%. The strategy has worked fairly well with the annualized returns over the last 12 years beating the overall universe. While the dividend paying strategy worked well, a strategy based on AFG’s valuation metric performed better.

To identify potentially attractive investment ideas, The Applied Finance Group (AFG) usually uses a combination of proprietary variables to develop a focused group of potential buy ideas that meet criteria based on valuation, economic performance, management quality, and earnings quality. Although this set of investment criteria has proven successful in generating buy ideas, AFG’s valuation on a standalone basis has consistently been able to identify mispriced securities and investment opportunities that outperform their chosen benchmark. The chart below illustrates that over a 14% spread was achieved between the returns of companies that rank in the top quartile of our valuation metric and companies that fall in the bottom quartile over the last 12 years on an annualized basis.

On ValueExpectations.com we often discuss embedded expectations in stock prices and what a company needs to deliver in revenue growth in the future in order to justify its current stock price. This process helps investors to better understand whether a company’s expectations are rich or low. When expectations are low companies tend to be more likely to outperform their benchmarks. Applying this strategy for an entire sector or index is also a good way to tell if the sector/index is overvalued or undervalued as a whole. In a recent article we examined the “priced-in” sales growth for the S&P 500 (INDEXSP:.INX) as a whole as well as on a sector level to try to understand which sectors have the most reasonable expectations and if the overall index looks over or undervalued. Our conclusion from that analysis was that the S&P 500 currently has somewhat rich expectations for sales growth relative to the revenue growth the index has delivered historically. We also concluded that the two sectors with the lowest expectations relative to past growth were the Healthcare and Energy sectors illustrated in the chart below.

While many investors often seek safety in the fixed-income market in times of economic uncertainty, corporate bond yields have dropped to their lowest levels in decades causing those investors to seek the steady income of dividend paying stock. Along with the stability of income as stock prices fall, dividend paying stocks can also be used to hedge against inflationary pressures and as a way to gain cash without moving in and out of positions. Rather than buying bonds, we recommend a strategy of buying safe, well managed, attractively-priced dividend stocks to “stay in the game” if the market does experience a run-up, while at the same time protecting your portfolio from a long-term bear market. However before sophisticated investors apply a strategy, they want to know whether that strategy has worked in the past. Utilizing The Applied Finance Group’s backtest system, we ran a strategy of investing only in companies with a market capitalization of greater than US$ 1 Billion and a dividend yield above 3%. The strategy has worked fairly well with the annualized returns over the last 12 years beating the overall universe. While the dividend paying strategy worked well, a strategy based on AFG’s valuation metric performed better.

Earlier in the week we provided an update of the top performing companies within the S&P 500 index to identify which stocks have driven the returns of the market so far this year and also to see which companies has been a hindrance on the S&P 500’s returns. To help narrow the list further and identify the problem areas in the market, below is a sector breakout of performance within the S&P500. You will notice in the chart below that the Energy, Financial and Health Care sectors seem to be dragging down the returns of the overall index, while the Consumer Discretionary and Industrial sectors are leading the way.

If large cap stocks are part of your investment universe and you are wondering what stocks appear most attractive in that realm, and what are the companies you should be selling right now, we have prepared a couple of lists with our favorite Buy and Sell ideas , by using relative analysis on some of our key stock selection criteria. Generally, large cap companies look relatively inexpensive from a valuation stand point right now. The tough economic environment is forcing the management to run leaner operations and increase efficiency by divesting losing business units and downsizing. As a result, these firms are typically able to squirrel away cash on their books and are poised to withstand prolonged periods of weakness in the economy, or grow if the market begins to appreciate at a more rapid rate. In addition, this enables them to buy back more shares and possibly increase dividends, thus providing investors a steady source of income until the current market cloud passes over. Our Attractive list below contains the large cap names with highest AFG valuation and performance metrics rankings. Despite the overall attractiveness of the large cap stocks at the moment, there are still companies in that universe that appear unattractive on a relative basis – their poor valuation score and poor AFG Recommendation, together with the expected decline of their Economic Margins (EMs) place them in the Unattractive list at this time.

Still think a double-dip is possible? Are you worried that the current economic recovery will be slower and weaker than the current consensus? Looking for a smart hedge against the current market volatility? Normally during times of economic weakness or volatility, investors will seek “safe” investments (fixed income/bonds) to lower their risk and guarantee some type of return. Yet corporate bond yields have fallen to the lowest level in decades and the economy is showing no signs of a surging recovery any time soon. The Federal Reserve continues to show concern about the recovery and looks unlikely to raise rates any time soon, further dampening the prospect that cash yields for bonds will improve. So if the recovery is weak, and you don’t want to hold a bond with a poor yield rate, what is an alternative approach to enacting a proven defensive strategy for investors? A better strategy is to buy a bucket of large market cap companies that look attractive from a valuation perspective (here at The Applied Finance Group, we like to look at valuation as well as economic profitability) and also pay a dividend. Dividend stocks offer investors a steady stream of income, similar to the bond market, yet have the chance to offer higher returns if you invest in stocks that are poised to outperform as well.

This week, we draw some inspiration from Fidelity’s Low-Priced Stock Fund run by Joel Tillinghast. Mr. Tillinghast is well-known for his fund’s tremendous track record of providing consistent return, capital preservation and total return and was named stock picker of the decade. The main strategy for this fund was to identify and invest in stocks trading below $10 as this space tends to experience more frequent mis-pricings and less analyst coverage helping him find under the radar gems which are out of favor but on the road to recovery. Fidelity’s Low-Priced Stock Fund averaged close to an 11% annual return vs. a 6% annual return for the S&P 500 over the past 15 years. The fund’s price limit has since been raised to $35 to widen the pool of investable stocks. With such consistent returns over a long time period we thought it would be interesting to see how a list combining Mr. Tillinghast’s strategy and AFG’s valuation methods would work out.

Today we will keep the criteria of looking for cheap companies expected to improve their economic profitability (Economic Margins) the same, however this time we will eliminate companies with management teams who are unable to create wealth for their shareholders using AFG’s Management Quality variable. One of the key variables AFG uses when identifying potential investment opportunities is the Management Quality Score, which provides insight into management’s ability to create or destroy shareholders wealth.

To identify potentially attractive investment ideas, The Applied Finance Group (AFG) usually uses a combination of proprietary variables to develop a focused group of potential buy ideas that meet criteria based on valuation, economic performance, management quality, and earnings quality. Although this set of investment criteria has proven successful in generating buy ideas, AFG’s valuation on a standalone basis has consistently been able to identify mispriced securities and investment opportunities that outperform their chosen benchmark. Several times over the last year ValueExpectations.com has released lists of companies narrowed only by the valuation properties of the company using AFG’s Value Score. In the near future we will highlight all of the “valuation-only screen” company lists released on VE since November 2008 and see how much value our valuation variable creates in the screening process. Listed below are the top 10 companies in the S&P 500 (INDEXSP:.INX) (excluding Financials) based on AFG Value Score alone. These companies look the most attractive from a valuation perspective relative to the rest of the S&P 500 index.

When searching for Large-Cap ideas, The Applied Finance Group’s (AFG’s) Buy/Sell lists are a good starting place for investors as it has proven to create a significant spread in performance between companies that come up on AFG’s buy list and those on the sell list. Focusing on companies based on AFG’s proprietary screening criteria (Economic Margin, valuation, quality of earnings, and management’s ability to create shareholder wealth) will save investors time in their research process. The result is a target group of stocks that can help you outperform. In the near future we will provide VE.com readers a list of unattractive stocks from each sector that will help our readers identify potential torpedoes to avoid in your portfolios. Below is a list of attractive companies in the S&P 500 (INDEXSP:.INX) from each major AFG sector (excluding financials). It serves as a focus list of companies for investors to begin with as they meet AFG’s criteria to be an attractive opportunity. They are more likely to outperform their sector peers and the S&P 500, the benchmark that AFG’s clients most often compare themselves with. Companies Include Exxon Mobil Corp. (NYSE:XOM) and Corning Inc. (NYSE:GLW).

A list of attractive stocks from within the Health sector that meet AFG’s definition of attractive based on Valuation, Corporate Performance, Management Quality and other key criteria AFG uses to identify the stocks that are most likely to outperform from within each sector. The Health sector has consistently ranked as the 2nd best sector to invest in (next to Technology) over the next year according to participants of The Market Forecast Project, a monthly survey of professional money managers.

To identify potentially attractive investment ideas, The Applied Finance Group (AFG) usually uses a combination of proprietary variables to develop a focused group of potential buy ideas that meet criteria based on valuation, economic performance, management quality, and earnings quality. Although this set of investment criteria has proven successful in generating buy ideas, AFG’s valuation on a standalone basis has consistently been able to identify mispriced securities and investment opportunities that outperform their chosen benchmark.

Several times over the last year ValueExpectations.com has released lists of companies narrowed only by the valuation properties of the company using AFG’s Value Score (defined below). Today, we will revisit these blog posts and compare the performance results of the companies previously identified to the results of their benchmarks.

Below is an update of the performance of the articles we have released where companies were identified by using AFG's valuation metric as the sole variable. Included in this table is the blog portfolio's performance, the performance of the index, and the spread relative to the index. The performance of all portfolios and their benchmarks are tracked from the date of the blog's release until last Friday's close. As you can see in the table below, companies identified by AFG as having an attractive valuation have performed quite well and have consistently outperformed their benchmarks.

If you are a professional investor and would like to better understand and access AFG's valuation metric to review your portfolio - Click Here

 

Below is an updated list of the S&P 500 companies with the most attractive valuations according to AFG’s valuation model including Freeport McMoran C&G (NYSE:FCX) and Fluor Corp. (NYSE:FLR).

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

AFG Investment Rank within Sector Ticker Name Sector  Opportunity Valuation Signal  Cheapest Stocks In The S&P 500 (NYSE:FCX)  FREEPORT-MCMORAN C & G Basic Material Attractive Attractive (NYSE:WAT)  WATERS CORP Capital Goods Attractive Attractive (NYSE:FLR)  FLUOR CORP Capital Goods Attractive Attractive (NYSE:TAP)  MOLSON COORS BREWING CLB Consumer Non Durable Attractive Attractive (NYSE:CL) COLGATE-PALMOLIVE CO Consumer Non Durable Attractive Attractive (NYSE:DNB) DUN & BRADSTREET CORP Consumer Services Attractive Attractive (NASDAQ:BIIB) BIOGEN IDEC INC Health Attractive Attractive (NYSE:PFE) PFIZER INC Health Attractive Attractive (NYSE:BMY)  BRISTOL-MYERS SQUIBB CO Health Attractive Attractive (NYSE:IBM) INTERNAT BUSINESS MACHNS Technology Attractive Attractive

 Click Here - If you are a professional investor and would like a review of your portfolio by an AFG representative or to discuss companies AFG find attractive that fit your investment style.

Applied Finance Group’s (AFG’s) Value Score defined - 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.

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

About the AFG Screener

Professional investors have many ways to screen and narrow their list of constituents to create a focus list of companies they use to select from to develop their portfolios. In the industry, there are many screeners that are part of subscriptions to databases and investment tools, however, many of them do not provide guidance on the best screening methods to use. Created by The Applied Finance Group (AFG), the AFG Screener tool is a web-based company-screening application located on AFGView.com that is designed to save you time when narrowing your list of constituents. More importantly, AFG’s screener allows you to use proprietary variables that have been proven to outperform, helping investors make better investment decisions.

AFG’s Screener allows clients to find aggregate groups of companies that meet specific criteria from AFG’s entire global universe of over 14,000 securities. Using the Screener, one can find a list of companies that either match one of AFG’s preset screens or one based on a customized screen that you create.

The AFG Screener identifies attractive valuations, strong management teams, corporate performance, and the quality of earnings of a company as well as all traditional financial variables,

Because AFG’s Screener is web-based, clients can gain access from anywhere that has an internet connection, convenience and ease of “one-click screening” with our default screens, various forms of result presentations, and compatibility with Microsoft Excel for further analysis.

How to Use AFG’s Screener

Access AFG custom built screens that many clients regularly utilize that include AFG’s proprietary Economic Margin (EM), valuation and management quality variables along with many others.

Build your own custom screens using any variables you are familiar with such as price multiples and other accounting information by themselves or coupled with powerful AFG variables with just a few clicks of the mouse.

Once you have narrowed your list of constituents to those companies that meet your specific criteria you can easily upload your new list into AFG’s valuation model to analyze each company in greater detail or see how they rank vs. their peers on key AFG variables.

Default / Custom Screens

Whenever a new user is introduced to AFG’s Screener, they are provided with two default screens – AFG’s Default Buy screen and AFG’s Default Sell screen. Using these screens, one can filter companies based on AFG’s buy/sell criteria.

However, the AFG Screener is very intuitive allowing clients to create their own screens based on custom criteria. There are countless combinations that can be used to create a custom screens, as there are over 600 variables to choose from. AFG’s Screener tool can be used to list companies based on Indexes, Sectors, Industries, and previously created Portfolios.

Using Excel / Further Research

AFG screens can also be accessed using AFG’s Excel add-in to combine results with other spreadsheets or to create a report for your investment team. Exporting your information will give you more freedom to read, organize and document your data as well as pull in other variables within AFG’s Excel add-in to easily rank order your list of companies based on the same variables available within the screener.

Example Screen:

Below is a list of 12 companies that resulted from a quick screen that sought to identify those companies within the S&P 500 with attractive valuations, market cap above $1 billion, expected to improve EMs greater than sector peers, and that have a current stock price of under $30. Improving EMS and an attractive default AFG valuation rank is a good place to start when looking for the companies most likely to outperform. This is just one simple example of the capabilities of using AFG’s screener tool to select a focused list of stocks that are the most likely to outperform and a list that is worthy of more time spent on due diligence on the companies that meet the specified criteria.

 

The Applied Finance Group would also  like to invite professional investors to join AFG’s Market Forecast Project so you can better understand what your peers currently think about the market and cultivate the “wisdom of Crowds” into actionable investment ideas and themes.

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