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CVS Caremark Corporation (NYSE:CVS) – An Attractively Priced Stock
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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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Identifying Large Cap Investment Opportunities - Including McDonalds (NYSE:MCD) Sprint (NYSE:S) and Hasbro (NYSE:HAS)
The Applied Finance Group (AFG) has a disciplined approach for identifying companies that are expected to outperform and underperform the market by using proprietary metrics and measurements that have been tested and proven through time. Because AFG’s research is fundamentally derived, AFG’s quantitative analysis spans across growth and value stocks, all sectors, industries, and market caps with over 20,000 covered securities globally. Using AFG’s proprietary criteria, AFG publishes a monthly buy/sell list to provide clients with a refined focused list as a starting point for potential investments. AFG clients can then use Value Expectations to further analyze the expectations embedded in a security’s price and to build out their own model to refine an intrinsic value of a company based on their own expectations.
When searching for Large-Cap ideas, AFG’s Buy/Sell list is a good starting place 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. Further 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 as well as identify potential torpedoes to avoid in your portfolios.
Below is a list of attractive and unattractive companies in the S&P 500 from each major sector (as defined by AFG). It serves as a focus list of companies for investors to begin with as they meet AFG’s criteria. 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.
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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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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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Best/Worst Analyst Rated Companies - Our Take
Bloomberg provides a score for companies within the S&P 500 based on an average of all analyst ratings from the street. Below is a table highlighting companies with the best analyst ratings, largest increase in rating, highest price targets, and worst analyst ratings and the valuation attractiveness of each of these companies based on The Applied Finance Group’s (AFG) valuation model.
Companies within each of these groups are ranked from most attractive from a valuation perspective to the least attractive. VE.com will actively track the performance of these recommendations and see how they stack up to the analyst recommendations in each group. AFGview.com, AFG’s professional investor website allows you to compare any company using their rating versus the consensus ratings of the sell side. If you are interested in an analysis on a specific company, contact afgsales@afgltd.com.
Best/Worst Analyst Rated Companies (Bloomberg)
AFG's 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.
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Four Stocks Investors Should Consider
Kohl's Corp (KSS)
The Company operates family-oriented department stores that sell moderately priced apparel, footwear and accessories for women, men and children; soft home products such as sheets and pillows; and housewares.
Why We Like It
1. Sound and successfully executed strategy: Continuous expansion by building new stores; Continuous expansion of private or exclusive labels; Conservative inventory management; more efficient marketing.
2. Fared better than competition in 2008: Opened nearly 80 stores in 2008 or about 9% growth, comps down 7.7% ytd, EBITDA down 6%. Comps and earnings erosions are smaller than competition such as JCP and Macy’s. Not to mention Mervyns which is filing for liquidation.
3. Financial Strength: Doesn’t own credit card operation, therefore, no worries of credit loss. Has financial book debt of just $2 billion, EBIT / Int ratio is more than 10 times.
4. Going forward: In 2009, Kohl’s is going to continue to utilize its strong financial position to continue to open new stores and remodel existing stores to grow market share in a very difficult environment. The company has a very attractive valuation and our tgt price is $46, suggesting about 22% upside.
Value Expectations Analysis on KSS
Cvs Caremark Corp (CVS)
The Company is a provider of prescriptions and related healthcare services in the United States. It operates two business segments: Retail Pharmacy and Pharmacy Services.
Why We Like It
1. A juggernaut in providing healthcare services: CVS now has the largest retail pharmacy, and the 2nd largest PBM business in the US. Great potential to bring more convenient pharmaceutical benefits to consumers, at lower cost, by integrating mail delivery, internet, telephone, and walk in options.
2. Less volatile Demand: Drug retail is largely non discretionary, aging population, higher use of drugs for preventive measures, and the proliferation of new pharmaceutical products.
3. Good execution:
* CVS always won the battles related to acquisition targets against other suitors and has always delivered promised synergies from those acquisitions. They are consistent enablers of acquired assets.
* Ytd, front store comps growth has been positive and EBITDA margins have grown consistently from the year ago periods too.
4. Overall: Buying a sophisticated leader of an industry with stable demand at a great price.
Value Expectations Analysis on CVS
Valero Energy Corp (VLO)
An independent refining and marketing company that owns and operates 17 refineries in the United States, Canada, and Aruba. It produces conventional gasolines, distillates, jet fuel, asphalt, petrochemicals, lubricants etc.
Why We Like It
1. Margins for diesel are more favorable than gasoline, since diesel (retail price) is currently selling about 33% higher than gasoline. VLO’s distillate production, which includes diesel, jet fuel and heating oil, rose to 35% of overall production in first nine months of 2008, up from 33% last year.
2. The market has priced in more than 40% sales decline long-term, but we believe that VLO can do better than that.
3. Gasoline demand is down 2.2% from a year ago at 9 million barrels per day. However, it is difficult to believe that a 2% dip in demand would translate into a P/E multiple of only 5.3 (ttm) or EV/EBITDA of 3.2 (ttm).
Value Expectations Analysis on VLO
Freeport-Mcmoran C & G (FCX)
The Company is engaged in the copper, gold and molybdenum mining through its majority-owned subsidiary, PT Freeport Indonesia.
Why We Like It
1. Market is pricing in about 40% long-term sales decline, so there’s been overselling in the stock because we think that FCX can do better than that.
2. One year following the prior recession in 2001, FCX outperformed the S&P 500 Index by 44%.
3. FCX is responding to reduced demand by cutting back production, suspending its $2 per share a year dividend, and delaying spending on expansion projects. The market has rewarded the company’s moves recently, pushing up shares about 20% over the past 5 trading days.
Value Expectations Analysis on FCX
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Best Comeback Stocks for 2009
BusinessWeek.com asked some fund managers which stocks they believe will rebound in 2009 and below is a list of those companies, their 2008 share performance along with the sales growth expectations priced-in in order to justify the current price. These companies were all severely punished and many overly-punished by the many negative things going on in the market/economy in 2008. Whether it be oil stocks suffering from the drastic drop in oil prices, share prices of coal stocks dropping due to fears of increased government regulations, industrial firms hurting from a huge worldwide slowdown in building or any other 2008 market over-reactions, many of the firms listed here could recover huge losses from 2008. If you think a firm on this list has been un-fairly punished by the market in 2008 and has low expectations for growing their sales compared to what they have delivered in sales growth the last 5 years, those are the firms that may be worthy of consideration as a possible investment opportunity.
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