NVDA

In our July 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 5 attractive and 5 unattractive 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.

New products ramping over summer: NVDA’s next-generation GPUs (called Fermi) began to ship recently and are selling out. Optimus, which enhances graphics while saving battery life, is on track for a strong H210, as the product has 70 design wins, with only 11 in production as of Q1’10 conference call, and 50 slated to be launched in time for “back to school” season. Tesla, a GPU computing product, is generating record revenues, and was recently adopted by IBM to power its high performance computing (HPC) line. This is a big achievement for Tesla, and speaks loudly for its potential. Tegra, a processor for mobile web, was also recently launched with the release of Microsoft’s Kin Smartphones. Management expects several design wins in 3G Android Smartphones as well as Tablets in H210.

Using The Applied Finance Group’s Intrinsic Value Chart, you can easily identify under and overvalued securities based on AFG’s default intrinsic value of the firm relative to its trading range and helps investors to identify good times to buy or sell securities according to what AFG believes the stock is worth. AFG’s valuation metrics have proven to be successful at identifying investment ideas that out and underperform and back-tests have consistently shown that AFG creates a significant spread in performance between those companies AFG identifies as overvalued and companies identified as undervalued. Today’s Chart of the Day is the default Intrinsic Value Chart for NVIDIA Corporation (NASDAQ:NVDA), a company that currently looks undervalued from strictly a valuation standpoint with an AFG Value Score of 91 meaning it ranks in the top 90th percentile of companies in the AFG universe in valuation attractiveness.

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!)

Ticker  Name Sector AFG Recommendation (NYSE:PFE)  PFIZER INC Health Attractive (NYSE:S)  SPRINT NEXTEL CORP Technology Attractive (NYSE:VZ) VERIZON COMMUNICATIONS Technology Attractive (NASDAQ:ORCL)  ORACLE CORP Technology Attractive (NASDAQ:DTV) DIRECTV GROUP INC (THE) Consumer Services Attractive (NYSE:Q)  QWEST CMMNCTNS INTL INC Technology Attractive (NYSE:DYN)  DYNEGY INC A Energy and Extraction Attractive (NASDAQ:EBAY) EBAY INC Consumer Services Attractive (NYSE:CHK) CHESAPEAKE ENERGY CORP Energy and Extraction Attractive (NYSE:WMT) WAL-MART STORES INC Consumer Services Attractive (NYSE:CVS) CVS CAREMARK CORP Consumer Services Attractive (NASDAQ:MSFT) MICROSOFT CORP Technology Attractive (NASDAQ:CSCO) CISCO SYSTEMS INC Technology Attractive (NYSE:BSX)  BOSTON SCIENTIFIC CORP Health Neutral (NYSE:TXN) TEXAS INSTRUMENTS INC Technology Neutral (NYSE:LOW) LOWE'S COMPANIES INC Consumer Services Neutral (NASDAQ:CMCSA) COMCAST CORP CL A Consumer Services Neutral (NYSE:MU)  MICRON TECHNOLOGY INC Technology Neutral (NYSE:XRX) XEROX CORP Consumer Durable Neutral (NASDAQ:DELL) DELL INC Technology Neutral (NYSE:EMC) EMC CORP Technology Neutral (NYSE:XOM) EXXON MOBIL CORP Energy and Extraction Neutral (NASDAQ:INTC) INTEL CORP Technology Neutral (NASDAQ:NVDA) NVIDIA CORP Technology Neutral (NASDAQ:YHOO) YAHOO! INC Miscellaneous Neutral (NYSE:MOT)  MOTOROLA INC Technology Neutral (NASDAQ:NWSA)  NEWS CORP A Consumer Services Neutral (NYSE:AMD)  ADVANCED MICRO DEVICES Technology Neutral (NASDAQ:AAPL) APPLE INC Technology Neutral (NYSE:MO) ALTRIA GROUP INC Consumer Non Durable Neutral (NASDAQ:QCOM) QUALCOMM INC Technology Neutral (NASDAQ:AMAT) APPLIED MATERIALS INC Technology Unattractive (NYSE:AA) ALCOA INC Basic Material Unattractive (NYSE:T) AT&T INC Technology Unattractive (NYSE:HAL) HALLIBURTON CO Capital Goods Unattractive

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.

+View our List of Value Expepectations Recommended Articles

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

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

 

 

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.

Here is a list of companies, two from each sector within the S&P 500 that are expected to improve their Economic Margins (EM) the most over the next two years along with the bottom two in each sector expected to have their EM’s deteriorate the most. Companies expected to improve their EM’s more than their sector peers have proven to be more likely to out-perform. Improving EM’s coupled with low expectations priced-in for sales growth are the companies on this list that may be worth a look as a potential investment.

Also included in this table is the implied sales growth priced-in over the next five years in order to justify the stock’s current trading price compared with their achieved 5 Year Median Sales Growth. Ask the question are the expectations for sales growth realistic compared with what revenue growth the firm has delivered in the last five years.

If you would like to learn more about the Economic Margin methodology or Value Expectations feel free to contact an AFG representative to schedule a web-demo at support@afgltd.com.

 

S&P 500 Companies with the Biggest Forecasted Change in Economic Margins