The Applied Finance Group's (AFG's) framework and approach for measuring corporate performance and valuation is what sets us apart from other research providers. The AFG valuation framework has proven through vigorous back-testing to be successful at identifying companies likely to outperform index and sector peers. In the last 12 years, the spreads between companies we have labeled Strong Buys and companies we label as Strong Sells is approximately 20%. As such, by focusing on companies that rate highly according to our valuation model and other key AFG metrics, investors can set themselves up for outperformance and avoid potential torpedo stocks.
Valuation is too often associated with a price multiple that signifies how much an investor will pay for each dollar of earnings generated by a company. In a price multiple framework such as P/E, an investor decides what the earnings of a company will be and then places a multiple on those earnings depending upon how confident they are about the earnings. As discussed in our explanation of why earnings fall short, the problematic nature of a price multiple is the noise in the underlying E of the equation.
Aside from the issues with earnings only represent 50% of the company's cash earnings, the price multiple also fails to link the investment the company has to make in order to generate a $1 of earnings, thereby missing half the financial picture.
Investors that use a P/E also treat companies that have high proportion of expense from research and development (R&D) exactly the same as companies with relatively little R&D even though companies with high R&D expenses are investing for the future while the others are not.
AFG's Valuation model addresses these issues by providing a systematic valuation framework which links the earnings power of a company to its invested capital, converting the company's earnings into cash flow measure and systematically modeling in the effects of competition through a company specific decay.
To identify potentially attractive investment ideas, AFG usually uses a combination of proprietary variables to develop a focused group of potential buy ideas that meet criteria based on valuation, economic performance, management quality, and earnings quality. Although this set of investment criteria has proven successful in generating buy ideas, AFG's valuation on a standalone basis has consistently been able to identify mispriced securities and investment opportunities that outperform their chosen benchmark.
In the section below you will find a list of companies from the S&P 500 which look attractive according to AFG's Valuation Model and other key metrics used in our stock selection process. This list can serve as a solid starting point for investors looking for large-cap investment ideas.
The defining characteristics of firms selected for our S&P 500 investment ideas:
- Large Cap US Stocks
- Superior valuation attractiveness as measured by the difference between a firms estimated intrinsic value and current trading price
- Non-Wealth destroying management track records, as measured by The Applied Finance Group's Economic Margin and corporate reinvestment strategies
- Companies with acceptable levels of earnings quality as measured by The Applied Finance Group's Earning's Quality metrics
The list above is derived from our weekly investment newsletter Investment Advisor Ideas, To see the other half of the companies that were provided in our newsletter, CLICK HERE to sign up and receive it on a weekly basis.
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