Value Expectations teaches professional investors how to make more informed investment decision evaluating stocks on the basis of corporate performance, valuation, management quality, earnings quality, and other proprietary variables. These variables inevitably help identify companies that are potential long-term investments while avoiding potential torpedoes. However, during the financial crisis, leverage and a week balance sheet played a significant part when investors evaluated a holding.

To help our institutional clients navigate the environment The Applied Finance Group (AFG) developed the risk analysis template specifically to model the healthiness of a company’s balance sheet. In addition to the risk analysis template we also developed a template that calculated an Altman Z-Score developed to identify companies that are most likely to go bankrupt.

As professional investors we often move on and like to forget the past concentrating on how to gain alpha in the future. However, not to forget the past we decided to post an update list in the S&P500 on companies that are financially healthy and are attractively priced using The Applied Finance Groups valuation model.

Provided below is a list of healthy Z-score companies within the S&P 500 that also look attractive based on The Applied Finance Group’s (AFG’s) investment criteria. All of the companies listed have an attractive valuation and are expected to improve their Economic Margins (AFG’s measure of what a company earns above its cost of capital) more than their sector peers. Companies expected to improve their Economic Margin’s (EMs) have proven to be more likely to outperform than companies with an expected decline in EMs.

Using AFG’s valuation model on AFGView.com, we identified a few firms that looked relatively attractive from a valuation perspective and had an Altman Z-Score above 2.99. Below is a list of those firms. Later we will look at firms that are expensive and have a Z-Score below 1.8.

About The Altman Z-score - Z-score is a metric that gives insights into the likelihood of a firm going bankrupt in the next 2 years. The model was developed by Professor Edward I. Altman of the NYU’s Stern School of Business and first published in The Journal of FINANCE in September 1968. A common critique to this metric is that it was developed over 40 years ago and is no longer relevant.

In 2001, Professor Joseph D. Piotroski of The University of Chicago Graduate School of Business, published a paper called, Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers. Piotroski showed that value investors were rewarded by looking at a firm’s financial health and he showed that Z-score was a meaningful statistic.

The Altman Z-Score breaks down firms into 3 zones:

• >2.99 – Not Likely to Go Bankrupt

• 1.8 - 2.99 – Gray Area

• <1.8 – Likely to Go Bankrupt in the Next 2 Years