Last week we took a look at the top performers in the S&P 500; today we're going to highlight the top performers in the Russell 2000 year-to-date and show you 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.
AFG's Valuation Signal incorporates a concept AFG calls Percent to Target (Percent to Target measures the percent deviation between a stock’s current trading price and AFG's calculation of a company's intrinsic value). To derive the intrinsic value of a firm, AFG uses its proprietary Valuation Model (this model is a robust modified discounted cash flow model that avoids pitfalls of traditional DCF models such as perpetuity and competition).
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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.