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Hot Retail Stocks - Including Ross Stores Inc. (NASDAQ:ROST), The TJX Companies Inc. (NYSE:TJX)
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25 Best Stocks of 2010, Our take on 2010’s hot stocks – Including Big Lots Inc.(NYSE:BIG), Family Dollar Stores Inc. (NYSE:FDO)
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Best Stocks Since Obama’s Election – Including Freeport-McMoran C & G (NYSE:FCX) Cognizant Tech (NASDAQ:CTSH)
With 2009 winding down and a full year in the books for the current administration, we have provided a breakdown of the best performing stocks since President Obama was sworn in as President on November 4, 2008.
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Sales Growth Expectations of S&P 500’s Top Performers – Including Cognizant Tech Sol. (NASDAQ:CTSH)
Using The Applied Finance Group's (AFG's) Value Expectations interface we have provided an analysis of the expectations embedded in the stock prices of some of the top performers in the S&P 500 year to date (excluding financials) to see which companies have the lowest expectations for sales growth (VE Sales Growth) relative to what the company has been able to deliver historically (5 Year Median Sales Growth).
AFG’s Value Expectations interface provides clients a platform to better understand economic profitability, and at the same time understand the performance a company must deliver to justify its current stock price. By understanding the embedded expectations a company must deliver to justify their current trading price, clients can develop a “hurdle rate” to quickly determine if the company’s expectations are rich or low. Take, for example, the typical company during the tech bubble: the expectations that were priced into the average tech stock far exceeded what it could realistically deliver. For this reason, AFG identified the technology sector as overvalued, as well as potential torpedoes such as Cisco, whose expectations were unrealistically high.
By gaining a better understanding of the embedded expectations built in to security prices, relative to what a company has delivered historically, can provide insight into the Sales Growth, EBITDA Margin, and Asset Turnover a company must deliver in the future to justify its current trading price. In many circumstances, if the imbedded future performance is very conservative relative to the company’s historical performance, the stock is regarded as undervalued.
The top performers of the S&P 500 listed below are ranked based on valuation attractiveness using The Applied Finance Group’s valuation model. You would like to look for companies with attractive valuations and modest expectations for revenue growth relative to what the company has been able to achieve over the past five years when looking for potential investment opportunities as these types of companies have proven through time to outperform firms with the opposite characteristics.
If you would like to view some of the favorite long and short investment ideas provided by professional investors click here to view the results for AFG's Market Forecast Project.
Sales Growth Expectations of S&P 500 Top Performers of 2009
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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.
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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 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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S&P 500 YTD Returns
With the first quarter of 2009 winding down, ValueExpectations.com has compiled a list of the best and worst performing stocks thus far in 2009 (excluding financials). It is not surprising for us to see two companies on the top performer list (S and MYL) that also appeared on our list at the end of January, or three bottom performing companies (ODP, TXT and MTW) still remaining on the bottom performer list over a month and a half later. We published an article in early February highlighting the top and bottom performers for the month of January and posed the question “Is the January Effect effective?”
Top 10 S&P 500 Companies (YTD 2009)
Bottom 10 S&P 500 Companies (YTD 2009)
Our conclusion: Looking at the YTD returns for the companies in our January effect article's top and bottom lists, we notice that there is a huge spread. January’s top performers have earned an average return of 4.66% YTD compared to January’s bottom performers’ average YTD return of -57.15%. This pretty compelling spread suggests that the January effect may be something investors want to pay closer attention to next year and it may even be helpful for the remainder of 2009.
*AFG’s Value Expectation allows us to understand the imbedded Sales Growth, EBITDA Margins, and Asset Turnover a company has to deliver in the future to justify its current trading price. In theory and in normal circumstances, if the imbedded future performance is very conservative relative to the company’s historical performance, the stock is regarded as undervalued. The table displays the implied future sales growth of companies assuming their EBITDA margins and Asset turnover stay constant at the company's historical 5 year median.
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Falling Like a Rock…Rising to the Top! Winners and Losers Year to Date
Below is Value Expectations’ analysis of the companies in the S&P 500 with the 10 best and 10 worst returns for 2009 YTD (excluding financial companies). Comparing the sales growth expectations priced in (VE sales growth) to what the company has delivered in sales growth historically allows us to see which firms have the most reasonable sales growth expectations implied by their current trading prices and thus are more likely to outperform. Will the companies with the best returns be able to maintain their momentum for the remainder of 2009? Will the companies with the worst returns be able to turn things around? We will track the S&P500 winners and losers in the year ahead and provide you with regular updates.
10 Worst S&P 500 Companies 2009 YTD
10 Best S&P 500 Companies 2009 YTD
*data as of close Feb. 20, 2009
*AFG’s Value Expectation allows us to understand the imbedded Sales Growth, EBITDA Margins, and Asset Turnovers a company has to deliver in the future to justify its current trading price. In theory and in normal circumstances, if the imbedded future performance is very conservative relative to the company’s historical performance, the stock is regarded as undervalued. The table displays the implied future sales growth of companies assuming their EBITDA margins and Asset turnovers stay at the 5 year median levels.
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So Far... So Good...
With just a few trading days under our belt in 2009, these stocks have made the biggest moves so far according to Bespoke.com. Will these stocks continue the January hot/cold streak into the rest of the year or is this just a fluke. Only time will tell. We measured the implied sales growth priced-in to justify their current price (VE Sales Growth) against what these firms have delivered in sales growth for the past 5 years to see which companies have low or reasonable expectations. Companies with low expectations for sales growth priced-in relative to what they have been able to deliver are the ones that are more likely to out-perform.
VE Sales Growth calculated on 1-13-09
These lists exclude financials.
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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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