Quant Model: Top 10 Long Ideas

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 |  Includes: AVGO, BHI, FCX, GME, HAL, HP, NFX, PHM, RDC, SCHW
by: Apus Investments

Summary

Our proprietary model screens all stocks on the S&P 500 and uses regression analysis to identify outliers.

We only look for stocks that are several standard deviations from the mean in their valuation.

The model is based a mean-reversion assumption for extreme outliers.

Quant Model Overview

Apus Investments' Quant Model ("AIQ Model") uses a proprietary system to identify stocks that are extreme outliers in their valuation relative to the mean of index constituents. The model is currently focused on the S&P 500 Index and uses several criteria to rank stocks:

  • 3 year forward growth rates for revenue, EBITDA, and EPS
  • Trading multiples for P/Sales, EV/EBITDA, P/E and P/BV
  • Cash flow margins and ability to generate cash
  • Leverage metrics and balance sheet strength

After taking into account each stock's current valuation (adjusted for growth rates and leverage ratios) the model uses regression analysis to determine fair value of each company relative to the index constitutions.

Sector specialists will be quick to point that each sector has its own metrics and nuances that a generalist approach does not take into consideration. We agree with this point wholeheartedly, but that is not the purpose of the quant model. The purpose of the AIQ Model is to identify stocks that are such extreme outliers in their valuation (adjusted for growth) that we expect to see some sort of mean reversion regardless of certain qualitative issues or sector nuances.

Top 10 Long Ideas

Based on our most recent screen of the S&P 500 and applying our proprietary system, the below companies represent the top 10 most undervalued (growth adjusted) stocks. We believe all of these stocks are significant enough outliers from the mean of constituents to justify a case for mean reversion.

Click to enlarge

Source: Author's analysis using Capital IQ consensus estimates.

Rowan Companies (NYSE:RDC) trades at 4.8x 2016E EBITDA and 7.1x 2016E EPS with Revenue growth of 42% and EPS growth of 95% from 2014 - 2016E.

I recently outlined why RDC deserves a re-rating and a target price of $57/share.

Rowan Companies plc provides offshore oil and gas contract drilling services. The company owns and operates 30 self-elevating mobile offshore jack-up drilling units and ultra-deepwater drill ships.

Helmerich & Payne (HP) trades at 5.4x 2016E EBITDA and 12.9x 2016E EPS with Revenue growth of 22% and EPS growth of 26% from 2014 - 2016E.

Helmerich & Payne, Inc. primarily operates as a contract drilling company in North and South America. It provides drilling rigs, equipment, personnel, and camps on a contract basis to explore for and develop oil and gas.

GameStop Corp. (GME) trades at 4.8x 2016E EBITDA and 9.5x 2016E EPS with Revenue growth of 17% and EPS growth of 43% from 2014 - 2016E.

GameStop Corp. operates as a multichannel video game, consumer electronics, and wireless services retailer.

PulteGroup (PHM) trades at 5.3x 2016E EBITDA and 9.4x 2016E EPS with Revenue growth of 31% and EPS growth of 69% from 2014 - 2016E.

PulteGroup operates in the homebuilding business in the United States. It is involved in the acquisition and development of land primarily for residential purposes within the United States.

Freeport-McMoRan (FCX) trades at 4.1x 2016E EBITDA and 7.7x 2016E EPS with Revenue growth of 41% and EPS growth of 93% from 2014 - 2016E.

Freeport-McMoRan Inc., a natural resource company, is engaged in the acquisition of mineral assets, and oil and natural gas resources. The company primarily explores for copper, gold, molybdenum, cobalt, silver, and other metals, as well as oil and gas.

Charles Schwab (SCHW) trades at 3.1x 2016E EBITDA and 17.0x 2016E EPS with Revenue growth of 34% and EPS growth of 68% from 2014 - 2016E.

The Charles Schwab Corporation, through its subsidiaries, provides securities brokerage, banking, money management, and financial advisory services.

Avago Technologies (AVGO) trades at 7.3x 2016E EBITDA and 12.6x 2016E EPS with Revenue growth of 44% and EPS growth of 46% from 2014 - 2016E.

Avago Technologies Limited is engaged in the design, development, and supply of analog semiconductor devices with a focus on III-V based products.

Halliburton Company (HAL) trades at 6.2x 2016E EBITDA and 11.0x 2016E EPS with Revenue growth of 20% and EPS growth of 56% from 2014 - 2016E.

Halliburton Company provides a range of services and products for the exploration, development, and production of oil and natural gas to the energy industry worldwide.

Baker Hughes (BHI) trades at 5.1x 2016E EBITDA and 10.4x 2016E EPS with Revenue growth of 19% and EPS growth of 58% from 2014 - 2016E.

Baker Hughes Incorporated supplies oilfield services, products, technology, and systems to the oil and natural gas industry worldwide.

Newfield Exploration (NFX) trades at 4.4x 2016E EBITDA and 11.7x 2016E EPS with Revenue growth of 34% and EPS growth of 71% from 2014 - 2016E.

Newfield Exploration Company, an independent energy company, is engaged in the exploration, development, and production of crude oil, natural gas, and natural gas liquids.

Conclusion

These top 10 long ideas represent opportunities to invest in extreme outliers based on their valuation adjusted for growth.

The purpose of the AIQ Model is to identify stocks that are such extreme outliers in their valuation (adjusted for growth) that we expect to see some sort of mean reversion and outperformance in their stock relative to the index.

Investors should perform their own fundamental analysis of companies recommended on this list before investing.

Disclosure: The author is long RDC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.