DDS

Below is a chart outlining the 2009 year-to-date performance of the sectors within the Russell 2000 (based on the sector classification of The Applied Finance Group). The Consumer Services sector has lead the way thus far, while Utilities and Financials have dragged down the overall performance of the index.

Since Consumer Services has lead the pack in 2009, we thought it would be helpful to provide a list of 10 companies within the sector, 5 of which still look like they have room to run while the other 5 now look overvalued. The 5 attractive companies are expected to improve their Economic Margins (EM) better than their sector peers this year and look attractive based on AFG's valuation model. The 5 unattractive companies are expected to produce a change in EM worse that their sector peers and look overvalued based on AFG’s valuation model.

Attractive and Unattractive Consumer Services Companies - Russell 2000 

Many of the institutional clients of The Applied Finance Group, Ltd. (AFG) tend to focus on large cap stocks and benchmark themselves against the S&P 500 Index, which is why many of the buy ideas from ValueExpectations.com usually come from the large cap index. Earlier in the week we highlighted companies from our buy/sell list both from large and small cap, as well as from growth and value style universes. We thought it would be a good follow up for some of the investors we work with who focus on small and mid cap stocks, to provide a more thorough list of companies from the Russell 2000 Index.

Below is a summary of 20 companies to watch from the Russell 2000 Index. The table highlights the 2 companies from each sector (ex. Financials) that have the most attractive Value Score (above 80) and are currently rated Neutral or higher by AFG’s buy/sell criteria. Factors used to derive an AFG recommendation include: Expected change in Economic Margins, Intrinsic Value, and Management Quality. Many classify stocks with market capitalization under $250 million as micro caps, therefore only those companies within the index that met that market cap minimum were considered for the list.

Russell 2000 - Stocks to Watch (above $250 million, ex financials)

What do we use to measure corporate performance and calculate an intrinsic value:
AFG’s 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 its cost of capital. Our Economic Margin Framework encompasses a valuation system that explicitly addresses the four main value drivers of enterprise value: profitability, competition, growth, and cost of capital.
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).
Management Quality – Assesses management’s ability to make wealth creating decisions.
AFG's Value Universe - Companies in the AFG universe, which have MV/IC at the bottom 50% of the universe and have EPS estimates.

To identify potentially attractive investment ideas, AFG usually uses a combination of proprietary variables to develop of focused group of potential buy ideas that meet criteria based on valuation, economic performance, management quality, and Earnings Quality. In December of 2008 ValueExpectations.com released a list of companies narrowed only by the valuation properties of the company using AFG’s Value Score (defined below). Our valuation techniques have proven successful through time at identifying mispriced securities and helping our clients identify investment opportunities resulting in outperforming their chosen benchmark. .

The ValueExpectations.com blog posted in December 08 (High Value Score Stocks - S&P 500) contained these high Value Score companies (DDS, S, NOV, MTW, SII, WFR, CHK) had returned 40% above the S&P 500 as of our 3-26-09 performance update and a recent check of that performance on 5-5-09 was even better, currently these companies have returned an astounding 64.5% above the return of the S&P 500 during the same time period (12-29-08 to 5-5-09).

In this exercise we used valuation independent of other key proprietary variables we use to identify good investment opportunities. Although valuation works well on a stand-alone basis, it works even better when used with AFG’s Economic Margin, Management Quality, and Earnings Quality variables.

Listed below are the top 10 companies in the S&P 500 (excluding Financials) based on AFG Value Score alone. These companies all look the most attractive from a valuation perspective relative to the rest of the index.

AFG High Value Score Stocks

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.

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.

These stocks all have an AFG Value Score above 95 which means these companies are in the top 5% in percentage upside relative to the universe based on AFG’s default target price. All of these companies also have lower sales growth numbers priced-in to justify the current stock price (VE Sales Growth) than what the company has achieved in the last 5 years (5 Year Median Sales Growth). Low expectations for sales growth compared to the actual sales growth achieved is a good sign the company can beat those expectations and will be more likely to out-perform. Low expectations coupled with attractive default AFG Valuation is a good starting point when looking for possible investment opportunities. Although these companies may not be able to achieve the same levels of sales growth they have experienced in the past 5 years, the expectations are so low that they do not have to return to those numbers to beat the very low expectations.

High Value Score (AFG) Stocks & Their Sales Expectations