5 Undervalued Companies for the Defensive Investor – May 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, which is available for premium subscribers.  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, CA Inc. (CA) dropped off the list and has been replaced with Bed Bath & Beyond (BBBY).

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

Deere & Co. (DE)

500px-John_Deere_logo.svgDeere & Co. is an excellent company that is suitable for either the Defensive Investor or the Enterprising Investor.  The only requirement for either investor type that the company does not meet is the PB ratio.  As a result, value investors following a ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the company as well as other opportunities, such as through a review of ModernGraham’s valuation of Caterpillar Inc. (CAT) or 5 Undervalued Companies for the Defensive Investor.  From a valuation perspective, the company appears to be significantly undervalued, having grown its EPSmg (normalized earnings) from $3.68 in 2010 to an estimated $7.62 for 2014.  This demonstrated level of growth more than supports the market’s current implied estimate of 1.94% earnings growth, leading the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.  (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 1.39% 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

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 2.34%, 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

Bed Bath & Beyond Inc. (BBBY)

500px-Bedbath&beyond.svgBed Bath & Beyond is a great company for Defensive Investors and Enterprising Investors to consider.  The only concern for either investor type is the lack of dividend payments.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the company and comparing it to other opportunities such as through a review of 5 Low PEmg Companies for the Defensive Investor and 5 Low PEmg Companies for the Enterprising Investor.  From a valuation perspective, the company appears to be significantly undervalued after growing its EPSmg (normalized earnings) from $2.38 in 2010 to an estimated $4.60 for 2014.  This demonstrated level of growth surpasses the market’s implied estimate of 2.37% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the price.
BBBY Chart

BBBY 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 1.91%, 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

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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