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A focus list of buys and sells for our readers to use as a starting point when looking to make changes to portfolio. This list contains attractive and unattractive stocks from every major sector excluding financials. AFG's buy and sell lists have proven through time to provide a significant spread between the buys and sells helping you to identify winners and avoid potential torpedoes.

A highlight of the overall attractiveness of the Technology sector which currently looks to be trading at a discount to its historical relative valuation and looks undervalued relative to the market. The Tech sector also has consistently been voted the best sector to invest in over the next year by participants in our monthly survey of professional investors called The Market Forecast Project.

The Applied Finance Group’s (AFG’s) suite of investment tools and research is designed to help investors make more informed investment decisions by helping them understand the performance a company must deliver to justify its current stock price in addition to calculating the firm's intrinsic value. By understanding the embedded expectations a company must deliver to justify its current trading price, clients can develop a “hurdle rate” to quickly determine if the company’s expectations are too rich or too low. Last week, AFG released its monthly stock market review which discussed the embedded expectations of the entire S&P 500 using the Value Expectations Interface. we concuded that the overall index is slightly undervalued, but trading pretty close to fairly valued. Using AFG’s Value Expectations Interface and Intrinsic Value Chart, we will provide a company example of each of the following scenarios: A) a company with an unattractive default intrinsic value and high expectations for sales growth B) a company with an attractive default intrinsic value and low expectations for sales growth.

The Applied Finance Group’s (AFG’s) Economic Margin (EM) methodology helps investors understand what a company earns above its true cost of capital or how profitable a firm is. Companies expected to improve their Economic Margins have proven to be more likely to outperform than companies with expected EM declines. The table below provides 5 stocks expected to improve their Economic Margins in the next fiscal year and look very attractive from a valuation perspective according to AFG’s valuation model.

In a recent Article by John Tamny, Forbes: To Fix The Global Economy, Fix The Dollar, the effects of a weakening dollar on the U.S. Economy were nicely summarized “When money loses value, it's the equivalent of governments raising the rate at which we pay income taxes. But with taxes, we can at least see how much the government is removing from each paycheck.”

A weakling dollar will likely be followed with higher inflation.   Although there are some who believe that a weaker dollar will strengthen our exports, the reality is that companies will be spending more to produce their goods and investors will require higher nominal pre-tax rates of return. Furthermore, an increase in the overall cost of capital for equities will result in less business expansion as companies must pay more to source their funds. 

So how do investors deal with a sluggish economy and declining dollar? As the U.S. economy faces many headwinds with a declining dollar, we recommend high quality, well managed, attractively-priced businesses with high foreign exposure.   Companies with a significant overseas exposure will likely benefit from currency appreciation against the dollar making sales in those currencies especially valuable.  

 
Using AFG’s proprietary research we thought we would provide you a solid list of well managed businesses, in the S&P 500 that also have over 50% in foreign sales.

Using AFG’s proprietary research we thought we would provide you a solid list of well managed businesses, in the S&P 500 that also have over 50% in foreign sales.

Attractive Companies In The S&P with High Foreign Sales
Ticker	Name	Foreign Sales %	EM Signal	Valuation Signal
AES	AES CORP THE	82.9185	Positive	Positive
CL	COLGATE-PALMOLIVE CO	76.7004	Positive	Positive
SE	SPECTRA ENERGY CORP	71.9551	Positive	Positive
GLW	CORNING INC	70.8978	Positive	Positive
HPQ	HEWLETT-PACKARD CO	68.7979	Positive	Positive
TAP	MOLSON COORS BREWING CLB	68.4812	Positive	Positive
DOW	DOW CHEMICAL CO THE	67.9052	Positive	Positive
CVX	CHEVRON CORP	67.6507	Positive	Positive
WU	WESTERN UNION CO THE	66.6793	Positive	Positive
DO	DIAMOND OFFSHRE DRILLING	59.2788	Positive	Positive
IBM	INTERNAT BUSINESS MACHNS	58.6122	Positive	Positive
PFE	PFIZER INC	57.688	Positive	Positive
FCX	FREEPORT-MCMORAN C & G	57.2432	Positive	Positive
EBAY	EBAY INC	53.5258	Positive	Positive
XRX	XEROX CORP	50.4819	Positive	Positive

 Source: The Applied Finance Group

Valuation Signal  – 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 (EM) Signal- 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.

For further guidance, we decided to contact John Tamny to ask him for his insights on what kind of stocks investors should be looking at?

John Tamny: If the dollar continues to weaken, investors will want to be in companies that are rewarded for finding physical assets of the earth (oil, gold, various commodities and businesses that serve commodity companies), while if the dollar were to strengthen or stabilize, investors would more want to be in intellectual companies such as software and other innovations

On Wednesday November 18th, Mr. Tamny, Toreador Economic Advisor and Forbes columnist will be discussing many of the reasons why a declining dollar has been hurting the growth of the US Economy along with:

• Should the dollar move to a gold standard?
• Is a trade "deficit" bad for the US Economy?
• Why a stable dollar is an essential input when it comes to economic growth.

Click here to get a replay of this talk!!

In yesterdays article we provided an update of the performance of our annual HOT STOCK LIST:

We also provided an update of the performance of the Toreador Large Cap Fund, TORLX which uses AFG’s Economic Margin Framework as part of its investment philosophy.

As you may note, both have done very well!

Today we decided to provide a Buy/Sell list to VE’s registered visitors applying some of these same investment principles: Economic Margin, Management Quality, and a company's Percent to Target (the deviation between a stock's current trading price and its current default target price according to AFG).

Below is a preview of the list which includes a Buy/Sell Recommendation on each Stock. The complete list, accessible to Value Expectations registered users, contains around 500 Stocks.

S&P 500 Rank (Preview) - August 11th 2009
Ticker	Company	Price	Recommendation
DRI	DARDEN RESTAURANTS	32.61	Strong Buy
KR	KROGER CO THE	20.93	Strong Buy
WLP	WELLPOINT INC	51.9	Strong Buy
AOC	AON CORP	40.55	Buy
FLR	FLUOR CORP	57.49	Buy
PCG	PG&E CORP	40.36	Buy
AMT	AMERICAN TOWER CORP	32.37	Neutral
IRM	IRON MOUNTAIN INC	28.85	Neutral
NOV	NATIONAL OILWELL VARCO	37.1	Neutral
BEN	FRANKLIN RESOURCES INC	92.13	Sell
EXPD	EXPEDITORS INTL WASH INC	33.04	Sell
QCOM	QUALCOMM INC	45.74	Sell
JDSU	JDS UNIPHASE CORP	5.93	Strong Sell
MWW	MONSTER WORLDWIDE INC	14.9	Strong Sell
NYT	NEW YORK TIMES	8.1	Strong Sell

Source: The Applied FInance Group

To download the complete list click here.

Every June, The Applied Finance Group (AFG) hosts its annual conference in Las Vegas to help its clients improve their understanding of AFG’s methodology and valuation framework. Putting these concepts into practice, AFG also provides several actionable Buy ideas that clients can add to their portfolio, upon returning to their office. One of the most popular sessions during the conference is called “Hot Stocks”- a time when AFG analysts give detailed analysis of several stocks that are currently of great interest to the investment community. Since its release on June 12, 2009, the “Hot Stocks” portfolio has outperformed the Russell 1000 by 5.85%. Below is a look at the four Buy recommendations within the “Hot Stocks” portfolio, and their performances as of August 13th 2009. Also provided below is the performance of the Russell 1000 index during the same time period.

Tomorrow Value Expectations will be issuing a ranking of the entire S&P 500 to registered Valueexpectations.com users. Register now to ensure that you receive this article.

Additionally Toreador's Large Cap Fund (TORLX) which uses AFG's Economic Margin Framework as part of its investment philosophy has recently crossed it's 3 year track record threshold, Click here to view  TORLX performance.

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 while Utilities and Financials have been dragging down the overall average of the index. As previously reported in our Market Forecast Project, Technology was also voted most attractive sector according to our survery of professional investors. These sectors are based on the sector classification created by The Applied Finance Group.

Source(The Applied Finance Group)

Source(The Applied Finance Group)

 

Ticker	Name	Sector	Attractiveness	Valuation	EM Change
Attractive Technology Companies - S&P 500
HRS	HARRIS CORP	Technology	Attractive	Attractive	Positive
IBM	INTERNAT BUSINESS MACHNS	Technology	Attractive	Attractive	Positive
ORCL	ORACLE CORP	Technology	Attractive	Attractive	Positive
WDC	WESTERN DIGITAL CORP	Technology	Attractive	Attractive	Negative
HPQ	HEWLETT-PACKARD CO	Technology	Attractive	Attractive	Negative
Unattractive Technology Companies - S&P 500
AMAT	APPLIED MATERIALS INC	Technology	Unattractive	Unattractive	Negative
JDSU	JDS UNIPHASE CORP	Technology	Unattractive	Unattractive	Negative
KLAC	KLA-TENCOR CORP	Technology	Unattractive	Unattractive	Negative
MU	MICRON TECHNOLOGY INC	Technology	Unattractive	Unattractive	Negative
CIEN	CIENA CORP	Technology	Unattractive	Unattractive	Negative

Source(The Applied Finance Group)

*Valuation & EM Change are Ranks within their sector

 

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.

What is the most attractive sector? That's one of the questions we asked a group of professional investors in our Market Forecast Project. The answer varied from person to person, but there was a general consensus.  The majority was in favor of Technology, which pulled away by far with 41 of a possible 98 first place votes. Survey participants were asked to rank a list of sectors from 1-11 in order of how attractive they found that sector to be over the next 12 months. Technology ranked highest with an average ranking of 2.7, well ahead of the rest; Basic Material placed second with an average rank of 4.8. We've put together a list below of both attractive and unattractive companies within the Technology sector.  It may be worthwhile to take a closer look at the companies listed. If the insight provided by the survey’s investment professionals holds true, you could be among those who outperform the market.

Market Forecast Sector Ranking Results
15. Rank Order, which sector seems most attractive to you over the next 12 months?
(1 = Most attractive)

Results Have Been Ranked by Most Attractive

                                                                                              1 Technology
                                                                                              2 Basic material
                                                                                              3 Energy & extraction 
                                                                                              4 Health
                                                                                              5 Capital goods 
                                                                                              6 Consumer non-durable 
                                                                                              7 Financials
                                                                                              8 Consumer services 
                                                                                              9 Consumer durable
                                                                                              10 Transportation
                                                                                              11 Utilities

10 Attractive Technology Stocks


10 Unattractive Technology Stocks

 

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).

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.

In our May Market Review we released a series of graphs representing the valuation attractiveness of each sector relative to its historical norms and to the entire AFG universe. Below is a graph representing the AFG Technology sector which is attractively priced when you compare against its historical trading ranges (red line) and when comparing against the overall AFG Universe (represented by the value of 1). Listed are the 10 most attractive and 10 least attractive companies in the AFG Technology sector that are within the S&P 500. Also listed below the graph is an explanation of AFG’s Relative Valuation Chart.

Technology Sector Relative Valuation Chart

Relative Valuation Chart -This graph shows the Percent to Target Current (Valuation Attractiveness) for a universe relative to the overall market. Values greater than 1 indicate the universe is more undervalued than the market, while values less than 1 indicate the opposite. The red line identifies the historical median value to provide a basis to understand valuation levels relative to historic norms. This example illustrates that the median Technology company is undervalued relative to the market currently and has been trading at a discount to its historic relative valuation, indicating a potentially attractive opportunity.

 

Top/Bottom 10 Companies In AFG Tech Sector Ranked by Valuation Attractiveness (within S&P 500)

 

Note: Telecommunications companies are included in the AFG Technology Sector

Fortune magazine recently put out an article listing the most admired companies in the world.  We took the top 50 firms (excluding Financials, and companies not traded in the US) on their list and put them through Applied Finance Group's quantitative recommendation framework.  Just because these firms are among the most admired companies in the world does not qualify them as the most attractive investment. Being among the most admired is an honor and means you must be doing something right, but might not necessarily mean the share price is currently attractive. 

The following articles which we have posted in the past on ValueExpectations.com will give you a better understanding of what it takes for management to create wealth, understand Management Quality, and see how EPS alone falls short in estimating a company’s value. There are two main characteristics a company must have in order to be a good investment opportunity: (1) the company needs to be a strong economic performer, (2) the company should be attractively priced.   Many people admired the DeLorean, but it was neither a good performing car nor a good priced car. Below we reveal a few "DeLoreans" after looking under the hood.

 

Top 50 Most Admired Companies According to Fortune

The tech sector has been taking a pretty bad beating the past few months but according to Bill Luby of SeekingAlpha.com, The 4 Horsemen of Tech (RIMM, AAPL, GOOG, AMZN) will be the most likely companies in the sector to make the strongest comeback when the tech sector makes a comeback. Here is a list of many of the big names in tech and the implied sales growth expectations priced-in to justify their current price. The companies with low sales growth expectations priced-in (VE Sales Growth) compared to what they have been able to deliver in sales growth (5 Year Median Sales Growth) are the companies we believe have the best chance of making a strong comeback with the sector.

According to historical valuations the tech sector appears to be trading at a discount compared to historical valuations such as the Tech Bubble.

Big Tech Companies and Sales Growth Expectations