GM

Here are the 10 best and 10 worst performing stocks in the S&P 500 for the month of May excluding financials. We have provided the returns achieved by each firm during the month of May (5-1-09 to 5-28-09) along with a look at the valuation attractiveness of each of these firms going forward.

May Biggest Movers In S&P 500 (Ex. Financials)

AFG's default valuation is a great place to start when looking for potential equity investments as 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.

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.

Click here for more information on our institutional tools and research.

Below is a chart and table outlining the 2009 year to date performance of the sectors within the S&P 500. The Technology sector has lead the way thus-far and the Financial and Utility sectors have been dragging down the overall index performance coming up on the halfway point of 2009. Along with sector performance we have also provided a table with the best and worst 10 performing stocks within the S&P 500 index so far this year.

It is nice to see that 2 of the top 10 performers in the S&P 500 index (S, FCX) are stocks that we have recommended on multiple occasions on ValueExpectations.com. VE.com recommended Sprint on 11/26/08 AFG Buys, 12/29/08 High Value Score, 3/13/09 10 Most Undervalued and Freeport Mc-Moran on 1/17/09 4 Stocks To Consider, 1/30/09 5 Cheap Stocks, 2/17/09 Digging Deep.

Average Sector Returns (S&P 500 YTD)

Average Sector Returns (S&P 500 YTD)

Best and Worst 10 Performing Companies YTD 2009 (S&P 500)

The Applied Finance Group

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.

The Applied Finance Group (AFG) has been providing institutional equity research for over 13 years to some of the largest institutional investment, consulting, and corporate firms globally. Our success has been a direct result of our track record, as seen below.

As the demand for our unique valuation and corporate performance insights has grown globally, so has our research. This summer we will be unveiling our global research platform which will provide our clients the ability to analyze companies around the world using our proprietary Economic Margin Framework and Valuation Methodology. To view our global performance booklet, click here.

For investors that are interested in knowing how our clients can rate the quality of management teams, below are two sample Wealth Creation Reports comparing General Motors and Porsche.  The graph below the wealth creation report represents the return of the company relative to the market. As you will notice, GM’s management team has had a consistent track record of destroying share holder value, while Porsche has done a great job of creating wealth for its shareholders.

While knowing how well management has run a company is important, you must always remember that great companies don’t always make great investments. This is why we overlay our valuation system to explicitly address the four main value drivers of enterprise value: profitability, competition, growth, and cost of capital. Unlike traditional valuation approaches that utilize highly sensitive perpetuity assumptions, our approach incorporates the widely accepted economic principle that competition will compete away excess returns over time.

Variables Defined:

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.

Earnings Quality, Accrual - An accrual is the difference between Cash Flow and Net Income. •Net Income = Cash Flow + Accruals •Low Accrual companies outperform high accrual companies

EM Momentum - EM +1: 1 Month Momentum - Month over month change in the 1 year out Economic Margin.

Management Quality - Evaluating Management:
• Assess the companies Economic Margin.
• Evaluate the ability for a company to sustain historical levels of Economic Margin performance.
• Build out future cash flows to better evaluate expected future performance relative to their peer group.
• Look at investment prospects of firms and review how they are growing or shrinking their business.

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.

Back in November we published an article on GM, Has GM Earned A Bailout?, and in our conclusion we said: "Given GM's consistent destruction of wealth and the tremendous amount of restructuring it would need, a bailout looks more like life support."

Recently GM announced it was reducing output, so we thought it would be timely to review our assessment on Good and Bad Management Strategies

Economic Margin is a measure of economic profitability that identifies how much a company earns above or below its cost of capital. We analyzed all companies in the S&P500 Index based on their historical, current and forecasted Economic Margins to see which firms have the best average of past, present and future profitability. We identified the two most profitable and the two least profitable companies from each sector and have presented them in the table below. As a base of reference, the average firm in corporate America earns a 0 (zero) Economic Margin, or is a “break-even business”. Our research has shown that companies with consistently positive EMs that are also expected to increase their EMs in the future tend to outperfom firms with negative or declining EMs.
<!--[if gte mso 10]> Economic Margin is a corporate performance measure, which helps us identify well managed, wealth creating companies. Although not included in this post, we want to remind you that it is also important to understand the attractiveness of corporations' valuations to make sure we invest in great companies at great prices. (Here is an article by ValueExpectations.com explaining Applied Finance Group’s basic valuation concepts).

Note: Only companies in the S&P 500 were included.

S&P 500 Companies With The Best/Worst Average Profitability (Economic Margin)

Economic Margin (EM) Defined: A measure of corporate performance that captures off balance sheet items, by looking at how much a company is earning above or below their cost of capital. EM is expressed in a % or margin. The Economic Margin Framework™ is more than just a performance metric as it encompasses a valuation system that explicitly addresses the four main drivers of enterprise value: profitability, competition, growth and cost of capital. more EM details (PDF)

Recently, Moody’s released a list of what they call “Bottom Rung Companies” which is based on the company’s ability, or lack thereof, to pay back the debt it owes. The 283 companies on the list roughly represent the riskiest 15% of all firms that Moody’s tracks. Moody’s does not always designate the most appropriate ratings (Fannie Mae and Freddie Mac were rated AAA before defaulting), so we decided to take their list into our own hands and provide the true bottom rung companies.

With so much negative news going around and many companies declaring bankruptcy, it is no surprise that measures of a firm’s financial strength, such as the Altman Z-Score (likelihood of a company to go bankrupt in the next 2 years), have been re-gaining popularity in the current market environment. So to help with our analysis, we used the Z-Score metric to analyze the companies on Moody’s list, as well as The Applied Finance Group’s (AFG’s) screening variables to determine how attractive these firm’s are from a valuation standpoint, and how each company’s forecasted profitability for their fiscal 2009 year looks (Forecasted Economic Margin). As a result, ValueExpectations.com has put together a list of the 17 “riskiest” companies to avoid. Each of these companies have “at risk” level Z-Scores, unattractive valuations, and are forecasted to achieve negative profitability (EM) for their 2009 fiscal year, all of which indicate that they will be more likely to underperform.

Below the table is a short description of the Altman Z-score and a breakdown of what the scores mean, along with a brief description of what Economic Margin (EM) is and how it is calculated.

 17 Companies At Risk of Bankruptcy

 The Altman Z-score defined: A metric that gives insights into the likelihood of a firm going bankrupt in the next 2 years. The model was developed by Professor Edward I. Altman of the NYU’s Stern School of Business and first published in The Journal of FINANCE in September 1968.

The Altman Z-Score breaks down firms into 3 zones:

• >2.99 – Not Likely to go Bankrupt

• 1.8 - 2.99 – Gray Area

• <1.8 – Likely to go Bankrupt in the Next 2 Years

Economic Margin (EM) Defined: A measure of corporate performance that captures off balance sheet items, by looking at how much a company is earning above or below their cost of capital. EM is expressed in a % or margin. The Economic Margin Framework™ is more than just a performance metric as it encompasses a valuation system that explicitly addresses the four main drivers of enterprise value: profitability, competition, growth and cost of capital. more EM details (PDF)

 Economic Margin Calculation:

Related Article: EPS Increased.....Company Underperformed?

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

Recently John Tamny wrote an article, Pull the Plug on General Motors, in which he discusses the various reasons why it essential to let GM fail. So we thought we would give you a graphical representation of GM's historical ability to create shareholder value, along with a Value Expectations scenario of what GM must generate to sustain its current price.

The Economic Margin chart below displays GM's consistent inability to earn it's cost of capital and continuous destruction of shareholder value.

Given such poor levels of EM's there is no surprise its relative returns to the market have plummeted.

So what does this mean for current shareholders?

Yesterday, GM's stock price closed at $3.59. So to put things into perspective, the graph below of our Value Expectations application displays the corporate performance GM must deliver to justify its current stock price. By holding sales growth at an 3% and asset turns of 1.20, GM needs to generate EBIDTA's of 12.29 annually for the next five years.

GM would have to deliver, and maintain, EBITDA Margins not seen since 1994

As shareholders you have to ask yourself, will GM ever be able deliver those levels of EBITDA Margins? As taxpayers we have to ask ourselves if a bailout would just be waste of tax payers’ money. Given GM's consistent destruction of wealth and the tremendous amount of restructuring it would need, a bailout looks more like life support.