Many of the institutional clients of The Applied Finance Group, Ltd. (AFG) tend to focus on large cap stocks and benchmark themselves against the S&P 500 Index, which is why many of the buy ideas from ValueExpectations.com usually come from the large cap index. For those investors who focus on small to mid cap stocks from the Russell 2000, we have provided a list of companies with the most attractive valuations within the index.
AFG's default valuation is a great place to start when looking for potential equity investments as our valuation techniques have proven successful through time at identifying mispriced securities and helping our clients identify investment opportunities resulting in outperforming their chosen benchmark.
Besides valuation, another thing AFG takes into account is a company’s Economic Margin ((EM_) which measures the true economic profitability a company earns above or below its cost of capital, and more importantly, the expected change in EMs. Companies expected to improve their EMs have proven through backtests to be more likely to outperform than those with EMs that are expected to decline. The list below contains 10 stocks that are expected to improve their Economic Margins at a greater rate than their sector peers, have attractive valuations and rate as attractive based on AFG’s overall investment opportunity criteria.
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.