Good Companies Don't Always Make Good Investments

Today we look at a recent article in CEO magazine by Mike Burdi of The Applied Finance Group (AFG) and Drew Morris using AFG’s Wealth Creation Index to rank the top wealth creating and wealth destroying CEOs within the S&P 500.

After comparing the top 5 on each list by using AFG’s valuation techniques and comparing the sales growth expectations built into their current price (VE Sales Growth) with what the companies have achieved in the last five years (5 Year Median Sales Growth), it is easy to see that good companies do not always make good investments. AFG’s Value Score measures the stock’s attractiveness relative to the universe based on AFG’s Intrinsic Value Target Price. The score is ranked from 1-100 with 1 being the most overvalued and 100 being the most undervalued stock in the universe. VE sales growth captures the sales growth expectations priced-in to the stock to justify the current price.

Although the top 5 are well run companies, that does not automatically qualify them to be good investments. Depending on what the market has priced in and how likely the company is to deliver that performance determines whether the company is a good investment or not. Many companies that have been beaten up and even those with wealth destroying CEOs may be a good investment if very low expectations are priced in and it seems the company can exceed their expectations.

Top 5 Wealth Creating CEOs

click to enlarge

*denotes company has only 3 years historical sales growth

Top 5 Wealth Destroying CEOs

VE Sales Growth was calculated for these companies on 12/14/08

Comments

[WACG:]

Another useless blog article that was created simply because words need to be generated and bandwidth used. The article is utterly uninformative - of what use is the observation that "Good Companies Don't Always Make Good Investments"? The article is a perfect example of chit-chat small talk that merely adds to background noise.

2008 Dec 18 10:33 AM

[User 59050:]

When someone takes the time to share their thoughts, you can either make a point about what they have said or move on. You are the one who posted a USELESS comment. . not the writer of the article.

2008 Dec 18 12:30 PM

[michael fro...:]

knowing what exactly they do to make money and where we are headed in the macro cycle is also important when buying good companies with beat down stocks. 5 years ago we were close to the macro market peak, comparing today to then is kinda pointless. it's not where we've been but where we're going that's important.

Jan 17 09:09 PM