THC

Last week on www.ValueExpectations.com we provided readers a list of the most reliable companies from the Russell 1000 based on the quality of earnings (accrual levels), management’s ability to create wealth along with other criteria The Applied Finance Group uses in its stock research process to identify firms that are the most likely to outperform. After the large selloff yesterday, with many predicting another large correction around the corner and the increasing number of bearish opinions on the market we will provide our readers a list of the riskiest firms in the Russell 1000 to avoid or to trim from your portfolio when looking to eliminate positions.

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 18 S&P 500 companies from every major AFG defined sector (ex. Financials) 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.

The Applied Finance Group (AFG), an independent equity research firm, would like to invite professional investors/money managers to participate in AFG’s Market Forecast Project (MFP). The MFP is a professional investor sentiment survey designed to help money managers make more informed investment decisions, enhance client communication and provide an edge in the portfolio construction process. The main focus of the MFP is to provide participants investment ideas, macro-economic sentiment and stock market predictions of a large and diverse group of investment professionals to see how other professional money managers in the industry view the market.

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.

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)

Ticker Name Sector YTD Return % S&P 500 Best Returns YTD 2009 (NYSE:THC) TENET HEALTHCARE CORP Health 373.04% (NYSE:XL) XL CAPITAL LTD Financials 363.78% (NYSE:GNW) GENWORTH FINANCIAL INC A Financials 319.44% (NYSE:F)  FORD MOTOR CO Consumer Durable 218.34% (NYSE:WDC) WESTERN DIGITAL CORP Technology 207.34% (NYSE:MU)  MICRON TECHNOLOGY INC Technology 206.82% (NASDAQ:WFMI)  WHOLE FOODS MARKET INC Consumer Services 204.77% (NASDAQ:WFMI)  EXPEDIA INC Transportation 184.83% (NYSE:FCX) FREEPORT-MCMORAN C & G Basic Material 172.87% (NYSE:AMD)  ADVANCED MICRO DEVICES Technology 169.91% (NYSE:GT)  GOODYEAR TIRE & RUBBER Consumer Durable 168.34% (NYSE:CBG)  CB RICHARD ELLIS GROUP Financials 164.58% (NASDAQ:JAVA)  SUN MICROSYSTEMS INC Technology 136.39% (NASDAQ:CIEN) CIENA CORP Technology 131.19% (NYSE:JWN) NORDSTROM INC Consumer Services 130.58% (NYSE:WYN)  WYNDHAM WORLDWIDE CORP Consumer Services 127.63% (NYSE:AKS)  AK STEEL HOLDING CORP Basic Material 124.46% (NASDAQ:SNDK) SANDISK CORP Technology 121.35% (NYSE:FTI) FMC TECHNOLOGIES INC Capital Goods 117.33% (NYSE:TER)  TERADYNE INC Capital Goods 116.83%

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.

AFG Rank within Sector Ticker Name Sector Investment Opportunity Valuation Signal EM Change Signal S&P 500 YTD Top Return Companies that Look Attractive (NYSE:WDC)   WESTERN DIGITAL CORP Technology Attractive Attractive Positive (NYSE:FTI)  FMC TECHNOLOGIES INC Capital Goods Attractive Attractive Positive S&P 500 YTD Top Return Companies that Look Unattractive (NYSE:JWN) NORDSTROM INC Consumer Services Unattractive Unattractive Negative (NYSE:MU)  MICRON TECHNOLOGY INC Technology Unattractive Unattractive Negative

Other Popular Articles: 

S&P 500 Expectations and Market Analysis 

Odds of a double dip of the economy

What Drives Market Prices? The Valuation vs. Momentum Dichotomy  

 

To stay updated on how other professional investor's currently view the market join our Market Forecast Project survey and be among the first to receive the results.

Keeping an eye on the big movers in the market does not help investors determine which stocks are poised to continue their upward or downward movement. To help our devoted readers identify the movers that still look fundamentally sound and those to walk away from, ValueExpectations.com has scored each of the top 10 Hot and Cold stocks of the month based on Valuation Attractiveness and Economic Margin Change.

If an investor should consider adding any of these stocks as a holding for a portfolio, one should look for companies with attractive valuations and expected improvements in a company’s Economic Margin (EM) which essentially is a measure of a company’s true economic profitability. As an additional level of analysis, we also recommend understanding the embedded expectations that are priced into each of these stocks.

AFG’s Valuation techniques and understanding of economic profitability have proven to identify mispriced securities in the market and help clients take advantage of mispriced securities. Accurately assessing a company’s profitability and understanding how to answer key questions such as… What is the cash flow generated by the company’s operations? How much capital is required? What are the opportunity costs of this capital? This robust process is what sets AFG’s corporate performance metric Economic Margin (EM) apart from other Value Based Metrics such as an IRR calculation, a CFIRR or a RONA Economic Profit approach.

It is not surprising to see the list of best performers dominated by Tech stocks as professional investors in our last month’s sentiment poll identified Technology as the most attractive sector to bet on in the upcoming months and companies like DOW and EK on their respective best and worst lists as they both have been discussed recently on VE.com. Dow was recently noted as one of the most attractive stocks within AFG’s Basic Materials sector (ranked 2nd most attractive sector amongst professional investors) in mid-august. Eastman Kodak (EK) is just one example of a torpedo AFG’s clients and ValueExpectations.com readers have avoided due to regularly being on AFG lists of stocks to avoid and also a model of poor Earnings Quality (high accruals) one way AFG filters out companies likely to underperform, and more likely to encounter a negative earnings surprise. EK has consistently had a poor EQ score according to AFG’s measure of accruals and continues to be ranked amongst the worst in its sector in Earnings Quality.

Rank within Sector September Returns Ticker Name Sector Valuation Signal EM Change Signal S&P 500 Best Returns In September (ex. Financials)  (NYSE:DYN) DYNEGY INC A Energy and Extraction Attractive Positive 24.73% (NYSE:DOW)  DOW CHEMICAL CO THE Basic Material Attractive Positive 27.32% (NYSE:PCS) METROPCS COMMUNICATIONS Technology Attractive Negative 24.61% (NYSE:CNX) CONSOL ENERGY INC Energy and Extraction Unattractive Positive 24.43% (NYSE:ODP)  OFFICE DEPOT INC Consumer Services Unattractive Positive 25.46% (NYSE:THC) TENET HEALTHCARE CORP Health Unattractive Positive 25.97% (NASDAQ:SNDK) SANDISK CORP Technology Unattractive Positive 29.71% (NYSE:AMD) ADVANCED MICRO DEVICES Technology Unattractive Positive 34.12% (NASDAQ:CIEN) CIENA CORP Technology Unattractive Negative 28.40% (NASDAQ:WYNN) WYNN RESORTS LTD Consumer Services Unattractive Negative 32.62% S&P 500 Worst Returns In September (ex. Financials)  (NYSE:FDO)  FAMILY DOLLAR STORES INC Consumer Services Attractive Positive -13.57% (NYSE:BSX) BOSTON SCIENTIFIC CORP Health Attractive Positive -5.51% (NYSE:MHP)  MCGRAW-HILL CO INC Consumer Services Attractive Negative -27.30% (NYSE:AEE)  AMEREN CORP Utilities Attractive Negative -6.11% (NYSE:MON)  MONSANTO CO Basic Material Fair Positive -6.16% (NYSE:KFT) KRAFT FOODS INC CL A Consumer Non Durable Fair Positive -6.02% (NYSE:DHI) D.R. HORTON INC Capital Goods Unattractive Positive -7.59% (NYSE:PHM)  PULTE HOMES Capital Goods Unattractive Positive -6.34% (NYSE:IRM)  IRON MOUNTAIN INC Consumer Services Unattractive Positive -6.27% (NYSE:EK)  EASTMAN KODAK CO Consumer Durable Unattractive Negative -11.74%

 

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.

AFG Investment Opportunity Rank within Sector % Move Since March 9th Low Ticker Name Sector Valuation Signal EM Change Signal S&P 500 Biggest Gainers Since March 9th Low (ex. Financials) (NYSE:TXT)  TEXTRON INC Capital Goods Unattractive Unattractive Negative 416% (NASDAQ:WYNN)  WYNN RESORTS LTD Consumer Services Unattractive Unattractive Negative 366% (NYSE:GCI) GANNETT CO INC Consumer Services Unattractive Unattractive Negative 365% (NYSE:ODP) OFFICE DEPOT INC Consumer Services Fair Unattractive Positive 969% (NYSE:GT)  GOODYEAR TIRE & RUBBER Consumer Durable Fair Unattractive Positive 342% (NYSE:F) FORD MOTOR CO Consumer Durable Fair Unattractive Positive 314% (NYSE:THC)  TENET HEALTHCARE CORP Health Fair Unattractive Fair 538% (NYSE:IP) INTERNATIONAL PAPER CO Basic Material Fair Unattractive Fair 467% (NYSE:WYN) WYNDHAM WORLDWIDE CORP Consumer Services Fair Fair Negative 422% (NYSE:DOW) DOW CHEMICAL CO THE Basic Material Fair Attractive Positive 308% S&P 500 Biggest Losers Since March 9th Low (ex. Financials) (NYSE:FDO)  FAMILY DOLLAR STORES INC Consumer Services Attractive Attractive Positive -12% (NASDAQ:CEPH) CEPHALON INC Health Attractive Attractive Positive -6% (NYSE:ABT) ABBOTT LABORATORIES Health Attractive Attractive Positive 1% (NYSE:DF) DEAN FOODS Consumer Non Durable Fair Attractive Positive -5% (NYSE:AZO)  AUTOZONE INC Consumer Services Fair Attractive Positive -2% (NYSE:PCS) METROPCS COMMUNICATIONS Technology Fair Attractive Fair -34% (NYSE:CAH) CARDINAL HEALTH INC Health Fair Attractive Negative -8% (NYSE:SUN)  SUNOCO INC Energy and Extraction Fair Attractive Negative 1% (NYSE:HES)  HESS CORP Energy and Extraction Fair Attractive Negative 1% (NYSE:HRB)  H&R BLOCK INC Consumer Services Fair Fair Positive -2%

 

Other Popular Articles: 

S&P 500 Expectations and Market Analysis 

Odds of a double dip of the economy

What Drives Market Prices? The Valuation vs. Momentum Dichotomy

Healthcare reform has been a hot topic of discussion in the news and on blogsites all over the country as the Obama administration mulls over whether or not a public option for healthcare makes sense and what a plan like that would entail. Any new reform to the current healthcare plan would have a great effect on stocks within the Healthcare sector. Below is a list of stocks we find attractive and a few that we find unattractive within the S&P 500 Health sector. The chart consists of each company’s attractiveness as an investment opportunity using The Applied Finance Group’s (AFG’s) buy/sell criteria (explained below), and also grades each company based on expected Economic Margin (EM) change and valuation ranks within the sector. Companies expected to improve EMs and that have a more attractive valuation than their sector peers have proven through backtests to be more likely to outperform than stocks AFG views as overvalued and that have an expected decline in EMs.

 

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.

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).
 

ValueExpectations.com has continued to provide investment ideas to help our readers make better informed investment decisions. In addition to finding Buy opportunities, VE.com also understands the importance of avoiding potential torpedoes given the current market volatility, so we have decided to provide a list of potential sell/short ideas from the S&P500 index (excluding Financials). These companies on our list look “At-Risk” of going bankrupt in the next 2 years according to the Altman Z-score (Z-Score), and look overvalued according to the AFG’s valuation framework.

Here is the list of 15 firms that you may want to avoid for your portfolio.

Overvalued S&P 500 Companies (Ex. Financials) with Poor Z-Scores (Altman Z-Score)

 

AFG Sell Criteria: When identifying possible sell/short opportunities (torpedoes) The Applied Finance Group (AFG) starts by running a screen using its proprietary Sell Criteria variables starting with Economic Margin. Economic Margin is a measure of corporate performance that identifies how profitable a company is by measuring how much the company earns above or below its cost of capital. In addition to corporate performance, AFG looks to identify those companies that are unattractively priced using our valuation model. Lastly AFG evaluates how well companies run their business using its Management Quality score, identifying companies that have management teams that destroy wealth.

The Altman Z-score - Z-score is 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. A common critique to this metric is that it was developed over 40 years ago and is no longer relevant.

In 2001, Professor Joseph D. Piotroski of The University of Chicago Graduate School of Business, published a paper called, Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers. Piotroski showed that value investors were rewarded by looking at a firm’s financial health and he showed that Z-score was a meaningful statistic.

More recently, on December 5, 2008, Dr. Altman was called to testify before a House of Representatives Committee on the condition of U.S. Automakers. In his testimony, he noted that Bloomberg, Inc. reported, “that approximately 1,000 users of their system per day access the Altman Z-Score model.”

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

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