5 Undervalued Companies for the Defensive Investor – March 2014

image (10)There are a number of great companies in the market today. By using the ModernGraham Valuation Model, I’ve selected the five most undervalued companies reviewed by ModernGraham. Each company has been determined to be suitable for Defensive Investor according to the ModernGraham approach. This is a sample of one screen that is included in ModernGraham Stocks & Screens, our monthly publication.  Defensive Investors are defined as investors who are not able or willing to do substantial research into individual investments, and therefore need to select only the companies that present the least amount of risk. Enterprising Investors, on the other hand, are able to do substantial research and can select companies that present a moderate (though still low) amount of risk. Each company suitable for the Defensive Investor is also suitable for Enterprising Investors.

This month, Wells Fargo drops off this list and CA, Inc. is added.

Value investors seeking to follow Benjamin Graham’s methods may also wish to review some 5 Outstanding Dow Components or 5 Low PEmg Companies for the Defensive Investor while proceeding with further research of all of the following companies:

Intel Corp (INTC)

500px-Intel-logo.svg

Intel Corp. fares extremely well in the ModernGraham requirements, passing every test of both the Defensive Investor and the Enterprising Investor.  This is a company that appears to present low risk of financial strife and may present relative safety of principal.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the opportunity.  An example of further research would be to look into some competitors, such as by a review of ModernGraham’s valuation of Hewlett-Packard Company (HPQ) and ModernGraham’s valuation of Texas Instruments (TXN).  From a valuation standpoint, the company looks very strong, having grown its EPSmg (normalized earnings) from $0.95 in 2009 to $2.00 for 2013.  This level of growth easily supports the market’s implied estimate for growth of 1.89%, and the ModernGraham valuation model returns an intrinsic value that exceeds the current market price.  Therefore, the company appears to be undervalued at the current time. (See the full valuation here)
INTC Chart

INTC data by YCharts

Deere & Co. (DE)

500px-John_Deere_logo.svgDeere & Co. is a strong company and passes the requirements for both the Defensive Investor and the Enterprising Investor.  The only knocks on the company in that regard is that the PB ratio is a little high, but that is not enough to eliminate the company from further review by either investor type.  The ModernGraham valuation model also views Deere & Co. favorably, as a result of the strong growth the company has demonstrated over the historical period.  The company’s EPSmg (normalized earnings) have grown from $3.83 in 2008 to an estimated $6.86 for 2013.  This level of growth surpasses the market’s implied growth rate of only 2.16%, and as a result it would appear the company is undervalued at this time.  Defensive Investors and Enterprising Investors should take a look at our review of Caterpillar Inc. as they do further research to determine whether Deere & Co. would be suitable for their individual portfolios.  (See the full valuation here)
DE Chart

DE data by YCharts

AFLAC Incorporated (AFL)

500px-Aflac.svgAflac is suitable for either the Defensive Investor or the Enterprising Investor, having passed all of the requirements of each investor type.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the company.  Such research may include a review of ModernGraham’s valuation of Unum Group (UNM).  From a valuation perspective, the company appears strong, having grown its EPSmg (normalized earnings) from $3.01 in 2009 to $5.59 for 2013.  This is a level of demonstrated historical growth that significantly outpaces the market’s current implied estimate of only 1.49% earnings growth.  The ModernGraham valuation model accordingly returns an estimate of intrinsic value that is well above a margin of safety when compared to the market price. (See the full valuation here)
AFL Chart

AFL data by YCharts

JP Morgan Chase (JPM)

500px-J_P_Morgan_Chase_Logo_2008_1.svgJP Morgan Chase is a very strong candidate for both the Defensive Investor and the Enterprising Investor.  Despite the financial crisis, the company passes all of the requirements of either investor type.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods, should feel very comfortable proceeding with further research into the company to determine whether it would fit in their individual portfolios.  This research should include a review of some competitor companies, through a review of ModernGraham’s valuation of Wells Fargo (WFC).  From a valuation perspective, the company appears strong after growing its EPSmg (normalized earnings) from $2.51 in 2009 to $4.41 for 2013.  This solid level of demonstrated historical growth outpaces the market’s current implied estimate for growth of 2.26%, leading the ModernGraham valuation model to return an intrinsic value estimate that is well above the market price. (See the full valuation here)
JPM Chart

JPM data by YCharts

CA Technologies, Inc. (CA)

500px-CA_Technologies_brand.svgCA Technologies looks very good in the ModernGraham approach based on Benjamin Graham’s methods for value investors.  The company passes the requirements of the Defensive Investor, failing only the current ratio requirement, and as a result is suitable for both Defensive Investors and Enterprising Investors.  All Intelligent Investors should feel comfortable proceeding with further research to determine if CA Technologies would be right for their individual portfolios, and that research may include reviewing other companies that pass the ModernGraham requirements with a particular emphasis on a comparison with ModernGraham’s valuation of International Business Machines (IBM) and ModernGraham’s valuation of Oracle Corp (ORCL).  From a valuation perspective, CA Technologies also looks good, having grown its EPSmg (normalized earnings) from $0.76 in 2009 to an estimated $2.02 for 2013.  This is a solid level of growth that leads the ModernGraham valuation model to calculate an intrinsic value that surpasses the market’s current price.  Therefore, the company appears to be undervalued at the present time.  (See the full valuation here)
CA Chart

CA data by YCharts

What do you think?  Are these companies a good value for Defensive Investors?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author held a position in Deere & Co. (DE), but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing those holdings within the next 72 hours.

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2 comments for “5 Undervalued Companies for the Defensive Investor – March 2014

  1. Nathan
    August 9, 2014 at 11:38 am

    Have you ever considered attempting to explain why some quality companies like CA, AFL, DE show up on your lists of Undervalued Companies for the Defensive or Enterprising Investor month after month. Obviously because their market price has been static, but digging a bit deeper. I know you give statements like the Defensive Investor is concerned about… (which helps a lot), but maybe taking it a bit further? I was just wondering. Thank you for your great service.

    • August 10, 2014 at 3:10 pm

      Nathan,

      Since the list posts are a screen of the top 5 companies within the category, they often will display some of the same companies for a period of time. The full screens, which are run monthly as part of the premium membership, contain a host of other companies and see a bit more movement in them.

      Thanks for the comment and please let me know if you have any other questions!

      -Ben

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