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 Short 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 overvalued (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.
Source: Author's analysis using Capital IQ consensus estimates.
Salesforce.com (NYSE:CRM) trades at 40.2x 2015E EBITDA and 113.6x 2015E EPS with Revenue growth of 64% and EPS growth of 113% from 2014 - 2016E.
salesforce.com, inc. provides enterprise cloud computing solutions to various businesses and industries worldwide. The company offers social and mobile cloud apps and platform services.
Netflix (NASDAQ:NFLX) trades at 32.1x 2015E EBITDA and 72.4x 2015E EPS with Revenue growth of 52% and EPS growth of 163% from 2014 - 2016E.
In a recent article Netflix: Failure To Stream Cash Flow I outlined why Netflix is extremely overvalued.
Netflix, Inc. operates as an internet television network, is engaged in the internet delivery of TV shows and movies directly on TVs, computers, and mobile devices in the United States and internationally. The company operates in three segments: Domestic Streaming, International Streaming, and Domestic DVD.
Equity Residential (NYSE:EQR) trades at 20.4x 2015E EBITDA and 56.0x 2015E EPS with Revenue growth of 4% and EPS growth of -7% from 2014 - 2016E.
Equity Residential, a real estate investment trust (REIT), engages in the acquisition, development, and management of multifamily properties in the United States. Equity Residential was founded in 1966 and is headquartered in Chicago, Illinois.
Under Armour (NYSE:UA) trades at 28.7x 2015E EBITDA and 58.8x 2015E EPS with Revenue growth of 50% and EPS growth of 62% from 2014 - 2016E.
Under Armour, Inc., together with its subsidiaries, develops, markets, and distributes branded performance apparel, footwear, and accessories for men, women, and youth primarily in North America, Europe, the Middle East, Africa, Asia, and Latin America.
Boston Properties (NYSE:BXP) trades at 19.4x 2015E EBITDA and 63.8x 2015E EPS with Revenue growth of 8% and EPS growth of 25% from 2014 - 2016E.
Boston Properties, Inc., a real estate investment trust (REIT), together with its subsidiaries, engages in the ownership and development of office properties. Its properties are located in Boston, Massachusetts; Washington, D.C.; midtown Manhattan, New York; San Francisco, California; and Princeton, New Jersey.
AvalonBay Communities (NYSE:AVB) trades at 22.4x 2015E EBITDA and 40.2x 2015E EPS with Revenue growth of 13% and EPS growth of -25% from 2014 - 2016E.
AvalonBay Communities, Inc. engages in the development, redevelopment, acquisition, ownership, and operation of multifamily communities in the United States. The company was founded in 1978 and is based in Arlington, Virginia.
General Growth Properties (NYSE:GGP) trades at 17.6x 2016E EBITDA and 62.8x 2016E EPS with Revenue growth of 5% and EPS growth of 25% from 2014 - 2016E.
General Growth Properties, Inc is an equity real estate investment trust. The firm invests in the real estate markets of the United States. It engages in owning, managing, leasing, and redeveloping high-quality regional malls. General Growth Properties, Inc was founded in 1986 and is based in Chicago, Illinois.
Autodesk (NASDAQ:ADSK) trades at 24.4x 2015E EBITDA and 45.5x 2015E EPS with Revenue growth of 14% and EPS growth of -9% from 2014 - 2016E.
Autodesk, Inc. operates as a design software and services company worldwide. Its Platform Solutions and Emerging Business segment offers AutoCAD software, a computer-aided design application for professional design, drafting, detailing, and visualization; and AutoCAD LT, a professional drafting and detailing software.
The Macerich Company (NYSE:MAC) trades at 19.6x 2015E EBITDA and 55.1x 2015E EPS with Revenue growth of 5% and EPS growth of 26% from 2014 - 2016E.
The Macerich Company is an independent real estate investment trust. The firm invests in the real estate markets of the United States. It primarily engages in acquisition, ownership, development, redevelopment, management and leasing of regional and community shopping centers located throughout the United States.
Apartment Investment and Management (NYSE:AIV) trades at 16.3x 2015E EBITDA and 98.6x 2015E EPS with Revenue growth of 2% and EPS growth of 180% from 2014 - 2016E.
Apartment Investment and Management Company is a real estate investment trust. The firm engages in the acquisition, ownership, management, and redevelopment of apartment properties. It invests in real estate markets of United States. The firm primarily invests in apartment properties.
These top 10 short ideas represent opportunities to profit from 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 underperformance in their stock relative to the index.
Investors should perform their own fundamental analysis of companies recommended on this list before making any investment decisions.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.