If there's any good news about the economy, it's the startling surge in corporate earnings. In the most recent quarter, about 80 percent of S&P 500 firms reported profits greater than Wall Street analysts expected, according to Thomson Reuters. That's the highest proportion of upside surprises since Thomson Reuters started tracking the data in 1994.

[Slide Show: 10 Companies Missing the Earnings Boom.]

The Applied Finance Group (AFG) is an independent equity research provider that has partnered with CEO Magazine in recent years to give investors insight into which CEOs do the best job of creating value for its shareholders; after all, that is what they are hired for.

The AFG/CEO Wealth Creation Index, which relies upon AFG’s corporate performance metric Economic Margin (EM), provides a better understanding of wealth creation than traditional accounting measures such as EPS and ROC. The link below will take you to the complete list of rankings of CEOs from S&P 500 companies that have held their current position for at least 3 years, based on their wealth creation abilities. Topping the rankings in 2009 is MasterCard’s (MA) Robert W. Selander, up from third place last year. Both Selander and runner-up Federated Investors’ (FII) J. Christopher Donahue run very high EM companies (24.5 percent and 20.6 percent three-year averages, respectively). Interestingly, both have been able to improve in a bad economy.

Q3 2009 Earnings Call

October 26, 2009 10:00 am ET

• ING drops on spin-off, rights issue. Dutch financial services company ING Group (ING) said Monday it will raise up to €7.5B ($11.3B) in a share issue, and split up its insurance and banking businesses, after reaching a deal to repay the government half of its €10B bailout loan ahead of schedule. ING has until the end of January to repurchase government-owned shares, and will launch the share issue on Nov. 25. "We appreciate the ongoing support of the Dutch state," CEO Jan Hommen said, "but fully recognize that it is in the best interest of all parties that we get back on our own feet as quickly as possible." Shares -8.1% premarket.
• Peltz takes a foothold in Legg Mason. Legg Mason (LM) will name activist investor Nelson Peltz to its board after he quietly accumulated a 4.3% stake; in exchange for the board seat, Peltz's Trian will agree to accumulate no more than 9.9% of the company over the next two years, and will vote its share in favor of the company's slate of nominees during that period. "We welcome Nelson," Legg CEO Mark Fetting said in a statement. "We look forward to benefiting from his insights and experience as we work together to build greater value for our clients and our shareholders." Peltz prefers to think of himself as a 'constructivist investor,' though he is known to pepper management with 'idea' phone calls and emails at late hours and on weekends.
• BofA's TARP exit hits snag. Sources say Bank of America's (BAC) plans to repay its TARP loans have fallen into question due to a dispute over how much more capital it needs to raise in order to exit government oversight. Having raised $40B in new equity since May, BofA thinks it's ready to return the government's $45B investment. But some officials say it should be required to raise more than the $40B determined by government stress tests, to give it the ability to deal with any potential economic relapses. Until it exits government assistance, BofA remains bound by pay czar Kenneth Feinberg's compensation limitations, which bank executives fear will hamper its abilities to recruit talent.
• NABE survey offers cheery outlook. U.S. companies expect to hire and invest more over the next six months, according to a survey released this morning by the National Association for Business Economics, and for the first time in a year more businesses reported a rise in capital spending over the previous quarter than a decline. All 78 panelists said business decisions are being made with expectations of positive GDP growth in 2010; of those, 73% see real GDP expanding 1-3%. The survey "provides new evidence that the U.S. recovery is underway," Chicago Fed's William Strauss said. "Improving credit conditions might be part of the explanation, with respondents indicating that credit remains tight but less so than earlier in the year."
• Capmark goes under. Not unexpectedly, troubled commercial real estate lender Capmark filed for bankruptcy protection on Sunday, wiping out the private-equity investments of KKR, Goldman Sachs (GS) and Five Mile Capital, which bought 75.4% of Capmark for $1.5B in cash and more than $7B in debt in 2006; GMAC owns the remainder. Capmark is negotiating the terms of the bankruptcy with its creditors, including Citigroup (C) and JPMorgan (JPM), but they have not yet reached an agreement over a prepackaged bankruptcy. U.S. banks hold more than $1T worth of mortgages backed by commercial property, on which analysts predict they could suffer losses in the neighborhood of $150B. Bad commercial property debts have played a pivotal role in the demise of many of the 106 banks that have failed so far this year.
• FDA OKs BioCryst's swine flu drug. The FDA approved emergency use of BioCryst Pharmaceuticals' (BCRX) experimental intravenous antiviral drug peramivir to treat severe cases of H1N1. "Based upon the totality of scientific evidence available, it is reasonable to believe that peramivir IV may be effective in certain patients," it said in a letter. The authorization is only for hospitalized patients who are not responding to either oral or inhaled antiviral treatments, or for whom nonintravenous drug delivery is not feasible.
• China: undertones of an exit. China's economic growth is likely to speed up this quarter, but the government will stay the course with its loose fiscal policy, senior officials said today. Still, analysts say the "unmistakable shift" in official statements signal Beijing is starting to think about how to unwind its pro-growth policies. China set itself a goal of 8% GDP growth this year, which officials say it's on track to fulfill.
• Lloyds eyes outsourcer CPA Global. Lloyds' (LYG) private-equity arm LDC is reportedly in talks to acquire legal outsourcing company CPA Global for £400M ($652M). Lloyds is stepping up its buyout activity, aiming to become a dominant player in Britain's dwindling private-equity deal market.
• Blackstone hopes for magic from Merlin. Looking to take advantage of buoyant equity markets, Blackstone (BX) is reportedly preparing to float its theme park operator Merlin Entertainments next year. Citigroup (C), Goldman Sachs (GS), Deutsche Bank (DB), UBS (UBS) and Nomura (NMR) are advising on what could be a $3.3B IPO. Merlin - which owns the London Eye, Madame Tussauds and the Sea Life centers - is the world's number-two park operator, after Disney (DIS).
• Madoff crony found dead. Jeffrey Picower, alleged to have extracted $7.2B from Madoff's Ponzi scheme, was found dead at the bottom of his Palm Beach pool Sunday. Madoff trustee Irving Picard alleges Picower and a group of longtime Madoff investors knew or should have known of the fraud, because they requested and received oversized returns of up to 950% on their investments.

Earnings: Mon. Before Open

• Alberto-Culver (ACV): FQ4 EPS of $0.33 beats by $0.01. Revenue of $358M (-7.2%) vs. $387M. (PR)
• Corning (GLW): Q3 EPS of $0.42 beats by $0.03. Revenue of $1.48B (-4.9%) vs. $1.42B. (PR)
• Lorillard (LO): Q3 EPS of $1.44 misses by $0.08. Revenue of $1.42B (+26.1%) vs. $1.32B. (PR)
• McGraw-Hill Companies (MHP): Q3 EPS of $1.07 beats by $0.02. Revenue of $1.88B (-8.4%) vs. $1.94B. Avg. daily volume for major exchange-traded derivatives fell 23.2% from a year ago. (PR)
• National-Oilwell Varco (NOV): Q3 EPS of $0.95 beats by $0.16. Revenue of $3.09B (-14.5%) vs. $2.9B. "While difficult credit market conditions have led to order rates below our expectations so far this year, we continue to pursue new rig opportunities aggressively, and seek and execute strategic internal growth and acquisition opportunities." (PR)
• RadioShack (RSH): Q3 EPS of $0.30 misses by $0.01. Revenue of $990M (-3.1%) vs. $961M. (PR)
• Tellabs (TLAB): Q3 EPS of $0.07 beats by $0.01. Revenue of $389M (-8.3%) vs. $394M. Shares +2.1% premarket. (PR)
• Verizon (VZ): Q3 EPS of $0.60 beats by $0.01. Revenue of $27.27B (+10.2%) in-line. Shares +2.4% premarket. (PR)
• Weingarten Realty Investors (WRI): Q3 FFO of $0.50 misses by $0.04. Revenue of $145M (-6.2%) vs. $143M. Sees full-year FFO of $2.08-2.16 vs. $2.26 consensus. Overall occupancy increased to 91.1% from 90.9% in Q2. "Conditions across most of the existing portfolio appear to be stabilizing as retailers are learning to adapt to current market conditions by managing inventories." (PR)

Today's Markets

Overseas markets were mostly higher Monday.

Lorillard is a 13 billion dollar company that sells over 40 cigarette brands including the #2 overall cigarette in America, Newport. Newports are the #1 menthol cigarette in America, and #2 overall with a 7.8% total market share.

Bloomberg quantifies the consensus analyst rating for a stock on a scale of 1 (worst) to 5 (best). Stocks with a 5 rating have 100% buy ratings. We recently calculated the historical consensus ratings for all S&P 500 stocks and found the average daily consensus rating for the entire index going back a year. As shown below, the consensus analyst rating for all S&P 500 stocks drifted lower with the overall market during the bear, but it bottomed about a month after the market bottomed back in March. Interestingly, it picked up along with the market throughout the spring and early summer, but when the market stumbled in July, analysts got really bearish and then stayed bearish even as the market turned around and went higher. Finally in mid-August, analysts began to believe in the rally again, and since then they've been upping their stock ratings. Currently the consensus analyst rating for stocks in the S&P 500 is 3.74 (out of 5).

click to enlarge

Altria Group's business lines are under constant threat of regulation. Altria owns Phillip Morris USA, the largest tobacco maker in the US. In June, President Obama enacted a law giving the Food and Drug Administration authority over the tobacco industry. Altria supported the move, while rivals such as Reynolds American Inc (RAI) fought the regulation and have challenged the law, stating that it violates their right to free speech. One of the moves that the FDA has made since the law came into effect was the September 22nd ban on all sales of flavored cigarettes excluding menthol. Altria's Phillip Morris USA was unaffected by the ban, while another one of its subsidiaries, John Middleton, makes flavored cigars, which continue to be legal and may benefit from the ban.

In recent weeks we have written several blogs (S&P 500 sector stock watch, Attractive stocks under $35, with potential investment opportunities, Solid S&P Value Companies, Cheapest Stocks In the S&P 500), discussing investment opportunities within the S&P 500. These stocks ideas all had favorable scores under The Applied Finance Group's (AFG’s) investment criteria, which includes economic performance, valuation, earnings quality and management’s ability to create shareholder wealth, among other criteria.

Another way that AFG identifies potentially attractive investments is through the use of its Value Expectations interface, which helps investors get a better understanding of the expectations embedded into stock prices. This interface 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 below displays the implied future Sales Growth (“Priced-in Sales Growth) of the companies we have recently recommended in our recent blogs, assuming their EBITDA Margins and Asset Turnovers stay at 5-year median levels.

Maverick Capital's most recent portfolio holdings reveal that the long/short orientated hedge fund bought up Computer Hardware, Drug and Banking companies over the 2nd Quarter of 2009, while dumping Telecom, Big Box Retailer and Communication Equipment companies.

Maverick's exposure to US traded equities rose by $915mm over the quarter, ending at $6,444mm. The firm, one of the US’s largest and most revered hedge fund managers, was founded in 1990 by Lee S. Ainslie and Evan, Sam, and Charles Wyly. Before starting Maverick Capital, Mr. Ainslie was a managing director at Julian Robertson’s Tiger Management Corporation. When evaluating companies, the firm typically looks for a combination of value and growth characteristics.

The Applied Finance Group’s (AFG’s) goal is to help its clients pick the best stocks in any index, sector or market cap through the use of its Economic Margin (EM) methodology, valuation techniques, and ability to evaluate management’s capability to create shareholder wealth. The EM methodology helps investors understand the true economic profitability a company has earned by making adjustments to correct for some of the common distortions in traditional GAAP accounting practices. The valuation model AFG has built has proven through time to identify mis-priced securities which helps its clients take advantage of those mis-pricings and outperform their chosen benchmark (most commonly the S&P 500).

Below is a list of companies from the S&P 500, one from each major AFG sector (Excluding Financials), that meet AFG’s criteria to be considered as an attractive investment opportunity based on expected improvement in EMs, attractive valuation and a management team following a wealth creating strategy.

Many investors thought that they could time the market to their advantage. But actually they just guessed about the psychology of other investors, trying to figure out when others might start selling. In fact this explains why so many investors were holding stocks while they also thought the market was overpriced, according to Robert Shiller from The Washington Post.

In today’s low interest rate environment, yield-hungry investors might want to invest in financially strong blue chip companies that offer the potential for stable and solid dividends. I filtered the 200 largest U.S. stocks (by market cap), and below are 20 highest dividend yield companies (sort by yield %).

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

Next up is Eric Mindich's hedge fund firm, Eton Park Capital. Mindich started the fund back in 2004 with $3 billion under management with a $5 million minimum investment. Nowadays, Eton Park manages over $6 billion. The fund's investment strategy draws upon Mindich's time at Goldman Sachs where he focused on merger arbitrage. He was so good at his job that he became the youngest partner in Goldman Sachs' history at the age of 27. In addition to merger arbitrage, Eton Park focuses on long/short equity strategies and even invests up to 30% of its portfolio into private investments.

The current issue of the 10x45 Bargain Hunter (pdf file) stock screening report, published on August 23rd, includes a table of the Top 45 "Magic Formula" Stocks, based on current consensus estimates of this year's earnings per share. This "Magic Formula" screen is based on a methodology advocated by Superinvestor Joel Greenblatt, author of The Little Book That Beats The Market.

Here are 10 'magic formula' companies that deserve a closer look:

Louis Bacon’s Moore Capital Management bought up equities over the second quarter of 2009, according to the most recent portfolio holdings of the global macro orientated growth investor. Overall, the hedge fund manager’s exposure to US traded equities rose to $1,158 million as of 6/30/2009 from just $510 million as of 3/31/2009.

Moore Capital’s largest purchase was a new $274.3mm / 7,150,000 share position in the iShares FTSE/Xinhua China 25 (FXI) ETF, which invests in the top 25 largest companies in the China equity market that are available to international investors. The other Chinese equity position in the firm’s portfolio was energy giant China Petroleum & Chemical Corp “Sinopec” (SNP). In Sinopec, the firm trimmed its position by 40,000 shares over the second quarter, resulting in an quarter end position of $9.9mm / 130,000 shares.

Companies that pay dividends show prudent fiscal management in place, which is an important piece of information about a business. Some investors believe that a dividends shows that earnings are real and not manufactured by smart accountants manipulating GAAP rules.

Companies that raise dividends however show not only smart cash management skills, but also confidence in the company’s near term prospects. This assurance of balance sheet strength, despite the challenging economic environment, show their focus on delivering sustainable long-term results to shareholders. The boards of several firms announced dividend hikes over the past week:

About Economic Margin

Created by The Applied Finance Group, The Economic Margin (EM) Framework was developed to evaluate corporate performance from an economic cash flow perspective and is an alternative to accounting-based valuation metrics. EM measures the return a company earns above or below its cost of capital and provides a more complete view of a company’s underlying economic vitality

Q2 2009 Earnings Call

July 27, 2009; 10:00 am ET

• Bernanke defends Fed. In a PBS Town Hall forum that taped on Sunday and will be aired this week, Bernanke defended the Federal Reserve's actions of the past year, telling participants "I was not going to be the Federal Reserve chairman who presided over the second Great Depression." Bernanke said he was 'disgusted' by the circumstances leading up to the rescue of some large firms and called for new legislation to allow non-bank financial firms to fail without going into bankruptcy.
• U.S. gears up for China summit. Ahead of a U.S.-China Strategic and Economic Dialogue, Geithner and Secretary of State Clinton called for a 'new framework' for the relationship between the two countries. In a jointly-written op-ed in the Wall Street Journal, Geithner and Clinton stressed the need to keep trade and investment open and for China to continue to reform its financial sector reform and shift away from an over-reliance on exports.
• Pay Czar gets down to business. Kenneth Feinberg, the U.S. 'pay czar' in charge of overseeing pay at bailed out firms, is pushing to renegotiate contracts and reduce overall outlays. Seven firms are subject to Feinberg's authority (Citigroup (C), Bank of America (BAC), AIG (AIG), General Motors, Chrysler, Chrysler Financial and GMAC) and have been meeting with him regularly to reach a compensation structure the government feels is appropriate. The firms must submit their proposals by August 13.
• Ericsson wins Nortel auction. Ericsson (ERIC) will acquire the wireless assets of bankrupt Nortel Networks for $1.13B in cash after winning Friday night's auction. The assets include Nortel's division in the CDMA wireless technology used in North America and the division for emerging LTE high-speed wireless technology, which is expected to see significant future growth.
• Aetna shops its PBM unit. Aetna (AET) is reportedly looking to sell its pharmacy benefits management business. Potential buyers include CVS Caremark (CVS) and Medco Health Solutions (MHS). A deal could net Aetna as much as $2B.
• High-speed trading could be gone in a flash. Senator Charles Schumer is pushing the SEC to ban so-called flash orders, a move that presents the biggest threat yet to high-speed trading in the U.S. stock market. With flash orders, some exchanges hold orders to buy and sell for a fraction of a second before publishing them on competing platforms. Flash trades make up less than 4% of U.S. stock volume, but potentially give hedge funds and Wall Street firms an unfair advantage over other investors.
• Gov't eyes UBS client visits. Pushing forward in the investigation of UBS (UBS), U.S. officials are focusing on client visits by UBS bankers to help identify U.S. citizens with accounts who may have evaded taxes. The trial against UBS was postponed until August 3 to allow time for a settlement, but talks between Switzerland and the U.S. could extend beyond the deadline.
• eBay revamps its marketplace. eBay (EBAY) is set to announce a series of changes to its core marketplaces to help large merchants sell new goods in greater quantities. To help volume sellers, eBay plans to limit the direct communication between buyers and sellers. The company will also update its search algorithm to favor new products, and introduce categories to describe an item's condition.
• Apple, record labels seek album sales. Apple (AAPL) is teaming up with record labels EMI, Sony Music (SNE), Warner Music (WMG) and Universal Music Group to help boost sales of digital music albums by including an interactive booklet, sleeve notes and other features with music downloads. Consumers purchase large quantities of music online, but tend to buy individual songs rather than the higher-margin albums.
• Friday's failures. Another slew of bank failures on Friday, including Waterford Village Bank of Clarence, NY (the first New York state failure since 2004) and the six subsidiaries of Security Bank of Macon, GA. The closures bring the 2009 total to 64, and the seven failures will cost the FDIC over $812M.

Earnings: Monday Before Open

• Aetna (AET): Q2 EPS of $0.68 misses by $0.10. Revenue of $8.7B (+10.3%) vs. $8.6B. Issues downside EPS guidance for FY '09 of $2.75-2.90 vs. $3.53 consensus. Shares -5.4% premarket (6:50 ET). (PR)
• Alpha Natural Resources (ANR): Q2 EPS of $0.22 misses by $0.16. Revenue of $386M (-45%) vs. $446M. Shares -2% premarket (8:00 ET). (PR)
• Corning (GLW): Q2 EPS of $0.39 beats by $0.07. Revenue of $1.4B (-17.6%) in-line. (PR)
• Enterprise Products Partners (EPD): Q2 EPS of $0.43 beats by $0.02. Revenue of $3.5B (-44.7%) vs. $4.5B. (PR)
• Foundation Coal (FCL): Q2 EPS of $0.67 misses by $0.04. Revenue of $405M (-1.7%) vs. $445M. (PR)
• Honeywell International (HON): Q2 EPS of $0.60 in-line. Revenue of $7.6B (+22%) vs. $7.7B. "Economic conditions, however, remain challenging and we are not planning for any recovery in 2009." (PR)
• International Coal Group (ICO): Q2 EPS of $0.07 beats by $0.05. Revenue of $278M (0%) vs. $307M. (PR)
• Lorillard (LO): Q2 EPS of $1.71 beats by $0.28. Revenue of $1B (+16.6%) vs. $969M. (PR)
• RadioShack (RSH): Q2 EPS of $0.39 beats by $0.11. Revenue of $966M (-2.9%) vs. $978M. (PR)
• Sohu.com (SOHU): Q2 EPS of $0.79 beats by $0.03. Revenue of $127M (+24.6%) vs. $123M. (PR)
• Tellabs (TLAB): Q2 EPS of $0.07 beats by $0.01. Revenue of $385M (-11%) vs. $381M. (PR)
• Verizon (VZ): Q2 EPS of $0.63 in-line. Revenue of $26.9B (+11.3%) in-line. Shares -1.2% premarket (8:00 ET). (PR)

Today's Markets

Asian markets closed mostly up. European markets and U.S. futures are feeling similarly optimistic.