The following table contains the two cheapest companies in the Russell 2000 from each sector based on The Applied Finance Group’s Recommendation and Value Score (explained below). All of the companies listed below are the most attractive in their sector based on AFG Recommendation, which factors in each companies Economic Margin, Intrinsic Value, and Management Quality Score. All companies listed also had the highest Value Score (upside) relative to their sector peers. Also provided is a VE analysis of each company to identify implied sales growth expectations versus what the company has delivered historically in sales growth over the past 5 years. Measuring the spread between a company’s VE sales growth expectations and what it has historically delivered should give you a good idea of which companies have the best chance of meeting or exceeding those expectations, and thus are more likely to outperform.
Given that the stock market has lost a tremendous amount of value over the past year, it is important to point out the market cap for the companies in the table. The twenty-two companies shown below have returned -53% on average over the past year vs. -33% for the Russell 2000 Index as a whole. Specifically, a few companies now maintain a market cap that some investors may define as micro caps. If micro caps are within your universe of focus, then the following table can help identify some gems to invest in, especially since micro caps (as well as small caps) have outperformed large cap stocks by about 10% since the market bottomed on March 9, 2009. However, if the “bigger” small caps are more to your liking, the table provides a good snap shot for several companies with respectable size that may outperform the Russell 2000, based on Value Score and imbedded expectations.
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Cheapest Companies In The Russell 2000 By Sector (excluding Financials)
A brief description of AFG's buy criteria variables is below:
• 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.
• Intrinsic Value/Value Score – A company's percentile ranking based on AFG’s modified discounted cash flow model to measure the intrinsic value of a firm compared to its peers.
• Management Quality – Assess management’s ability to make wealth creating decisions.
Applied Finance Group’s (AFG’s) Value Score defined - 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.
*AFG’s Value Expectations allows us to understand the Sales Growth, EBITDA Margin, 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 the list of companies assuming their EBITDA Margins and Asset Turnovers stay at the 5 year median levels.