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S&P 500 – YTD Returns by Sector (AFG) and Attractive Capital Goods Companies like General Dynamics Corp. (NYSE:GD)
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Unattractive Stocks From Every S&P 500 Sector - Coca-Cola Enterprises (NYSE:CCE) and Fedex Corp. (NYSE:FDX)
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Unattractive S&P 500 Companies - Including Goodyear Tire & Rubber (NYSE:GT) and Monsanto Company (NYSE:MON)
The Applied Finance Group (AFG) works with some of the most well respected investment firms in the U.S. to help them develop quantitative screening processes to identify a better pool of companies to choose from for their portfolio holdings. However, picking winning investment opportunities isn’t the only value AFG provides clients. AFG also develops quantitative strategies to quickly identify possible torpedoes lurking in your client or prospective client’s portfolio.
AFG’s quantitative process is centered on the proprietary Economic Margin (EM) Framework (what a company earns above its true cost of capital). The core of AFG’s quantitative process starts with evaluating corporate performance and the expected improvement relative to their peers, evaluating the valuation attractiveness of the company, and determining if a firm is following a wealth creating or wealth destroying strategy.
A brief description of those variables is available below the list of companies.
When identifying potential torpedoes AFG looks for companies with the least valuation upside compared to their sector peers, below sector median expected Economic Margin change, and a management quality score that reflects a management team following a wealth destroying strategy.
These 12 S&P 500 companies are potential torpedoes that could be lurking in your portfolio. These companies all possess characteristics that make for a bad investment opportunity. If you own one of these companies or consider adding one to your portfolio, we suggest taking a closer look as they look the most likely to underperform their sector peers according to criteria that has proven successful at identifying winners and losers in the market.
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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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Top S&P 500 YTD Returns – Which Companies/Sectors Have Performed Best So Far - Including Nordstrom Inc. (NYSE:JWN)
With 3 Quarters of 2009 now in the books, we thought it would be timely to provide a list of the top 20 performers in the S&P 500 so far this year to give investors an idea of which stocks have been doing well. Along with the list of top 20 performing companies, we have also provided a breakdown of the average return by sector as defined by AFG vs. the entire S&P 500 index to show which sectors have been leading the way. Also by using The Applied Finance Group’s (AFG's) research and valuation model we have provided further analysis on 4 of the top performing companies, 2 that we find attractive going forward and 2 that we find unattractive, based on valuation attractiveness, expected improvement in economic profitability and the overall investment attractiveness, which is based on various criteria AFG uses when identifying long/short opportunities.
Top 20 Performers In S&P 500 YTD (Total Return)
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2009 YTD Sector performance (average return %) in S&P 500
Here are a few companies from the list of top 2009 returns and we view these companies going forward based on valuation, Economic Margin Improvement, and other criteria AFG uses to value securities.
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S&P 500 Biggest Movers Since March 9th Bottom (ex. Financials) – Including Family Dollar Stores (FDO) Textron (TXT)
On March 9th 2009, the S&P 500 hit its low mark of the year of 666.79. Since March the market has rallied up to 1,068.78 as of the close on September 16, 2009 and we thought it timely to analyze the companies that have made the biggest gains and losses since the low and provide some insights on how we view the 10 biggest gainers and losers in the index going forward. All of the biggest movers have been ranked based on attractiveness according to The Applied Finance Group’s (AFG’s) investment criteria and valuation model. The companies with the most attractive valuations and positive Economic Margin (AFG’s measure of corporate performance) movement have proven to be more likely to outperform those companies that look unattractive according to AFG investment criteria and that look expensive within AFG’s valuation model.
The list below contains the companies that have experienced the biggest price movements in the S&P 500 since the March 9th low and how each of these companies measure up going forward, according to AFG’s investment criteria and valuation model. Companies that look attractive according to AFG’s valuation model along with improving Economic Margins have proven through vigorous back-tests to identify the company’s most likely to outperform their benchmark.
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S&P 500 Top 10 Returns 2009 YTD
Now that we are more than halfway through 2009, It is an excellent time to highlight the top performers in the S&P 500 year-to-date and see which companies look the most attractive according to The Applied Finance Group (AFG). AFG’s valuation techniques have proven successful since 1996 at identifying mispriced securities and helping their clients take advantage of those market inefficiencies. Beyond valuation AFG helps clients understand the true economic profitability a company earns by using their Economic Margin methodology.
Economic Margin (EM) corrects distortions caused by traditional accounting policies to give a more accurate assessment of a company's true profitability. It is important to understand the direction a company's EM's are heading because companies expected to improve their Economic Margins have proven to be more likely to outperform than those with EM’s expected to deteriorate. The EM Framework addresses profitability, competition, growth and cost of capital. When factoring in each of these variables, investors can fully assess a company's value.
AFG's Buy/Sell criteria factors in Economic Margin, Management Quality, and AFG's Valuation Metric. In order to determine Management Quality, AFG scores management on their growth decisions in accordance with the company’s ability to either create or destroy wealth. AFG's Valuation Metric measures a company's Percent to Target (the 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.
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).
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S&P 500 - YTD Returns by Sector
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
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The Election Effect
The timing and performance of the stock market had an important impact on the outcome of the election just as the outcome of the election has had an impact on these 20 stocks since the election-day.
Listed are 10 of the best and worst performing stocks in the S&P 500 (excluding financials) since the November 4th election and their 5 year implied sales growth that the company needs to earn to be fairly valued at the closing price on 12/1/08.
*LIZ has since been removed from the S&P 500
Biggest Winners Since The Election
Biggest Losers Since The Election
Recently we also screened the S&P 500 to identify investment opportunities and identified over 150 companies (industrials) that have negative sales growth expectations embedded into their current market valuations. These companies include high quality companies such as: COH, DOW, CAH, TGT, JNJ, UTX, SBUX, and WAG, among others. If you would like to Read our study Click Here
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Earnings Quality (EQ), why it is so important now and which stocks are suspect.
EQ is important in this current market environment because so many companies are feeling pressure to meet their sales expectations. Many companies are channel-stuffers, which is one form of accruals that often leads to negative earnings surprises. A recent poster-child for this example of sending excess inventory to stores that could not sell their products would be Crocs and the way they tried to pad their sales numbers.
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
Two ways to approach accruals:
1. Cash Flow Statement
•Difference between Net Income and Cash Flow
2. Balance Sheet
•Change in Net Operating Assets from Period t-1 to t
•Net Operating Asset equals Total Assets Less Cash, Less Non-Debt Liabilities (excl. Minority Interest)
-Our studies show that the Balance Sheet approach is superior to the Cash Flow Statement approach.
-We found the Balance Sheet approach is also easier to expand to international companies.
We screened the S&P500 to identify those firms with the worst EQ scores. The score is given from 1-100, 1 being the best EQ company, 100 being the company with the highest amount of accruals and the worst EQ. Because high EQ companies are more likely to have negative earnings surprises, this is a group of companies you may want to avoid. The EQ variable works well as an exclusionary variable coupled with AFG’s valuation model.
After running our screen we identified 14 firms as the worst Earnings Quality firms. You can set yourself up for success and save time by narrowing your list of constituents to only those that meet our standard valuation, Economic Margin and Management Quality checks and following that up by filtering out those companies most likely to have negative earnings surprises (high EQ). The Chart Below identifies the firms that met our screen criteria, along with the EQ score and our VE analysis.
Worst 10% Earnings Quality Companies In the S&P 500
Universe Size: 4,000 to 5,000 Firms
Source: Applied Finance Group Database from 9/1998-5/2008
This variable does not add any value for companies within the financial sector and those companies are automatically screened out when using this variable.
Recently we also screened the S&P 500 to identify investment opportunities and identified over 150 companies (industrials) that have negative sales growth expectations embedded into their current market valuations. These companies include high quality companies such as: COH, DOW, CAH, TGT, JNJ, UTX, SBUX, and WAG, among others. If you would like to Read our study Click Here
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