Feature Screens

5 Undervalued Companies to Research for the Defensive Investor – August 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, Bed Bath & Beyond Inc. (BBBY) dropped off the list and has been replaced with Wells Fargo & Co. (WFC).  Be sure to check out the history of this screen to find out which companies have been selected in the past!

Deere & Co. (DE)

500px-John_Deere_logo.svgDeere & Co. is suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s only concern is with the high PB ratio while the Enterprising Investor has no significant concerns.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Caterpillar Inc. (CAT).  From a valuation side of things, the company appears to be significantly undervalued after growing its EPSmg (normalized earnings) from $3.68 in 2010 to an estimated $7.77.  This strong level of demonstrated growth is greater than the market’s implied estimate of 1.57% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s methods, to return an estimate of intrinsic value that is well above the market price at this time.  (See the full valuation here)
DE Chart

DE data by YCharts

CF Industries Holding Inc. (CF)

CfindustrieslogoCF Industries is a very intriguing company for both Defensive Investors and Enterprising Investors.  The Defensive Investor’s only concern is the lack of earnings stability over the last ten years, while the Enterprising Investor’s only issue is with the level of debt relative to the net current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  Looking at the company from a valuation angle shows the company to be significantly undervalued after growing its EPSmg (normalized earnings) from $7.11 in 2010 to an estimated $21.47 for 2014.  This strong level of demonstrated growth greatly exceeds the market’s implied estimate of 1.23% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the price.  (See the full valuation)
CF Chart

CF data by YCharts

Aflac Inc. (AFL)

500px-Aflac.svgAflac accomplishes a rare feat by passing all of the requirements of both the Defensive Investor and the Enterprising Investor.  Neither investor type has any major concerns with the company, and all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to competitors such as through a review of ModernGraham’s valuation of Chubb Corporation (CB) and ModernGraham’s valuation of Allstate Corporation (ALL).  From a valuation side of things, Aflac looks significantly undervalued after growing its EPSmg (normalized earnings) from $3.66 in 2010 to an estimated $5.96 in 2014.  This strong level of demonstrated growth outpaces the market’s implied estimate of only 0.96% earnings growth and leads the ModernGraham valuation model, which is based on one of Benjamin Graham’s formulas, to return an estimate of intrinsic value well above the market price. (See the full valuation here)
AFL Chart

AFL data by YCharts

Eastman Chemical Company (EMN)

200px-Eastman_Chemical_Company_logo.svgEastman Chemical Company qualifies for either the Defensive Investor or the Enterprising Investor.  In fact, the only requirement of either investor type which the company does not pass is the Enterprising Investor’s requirement of low debt to net current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of The Dow Chemical Company (DOW).  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.06 in 2010 to an estimated $5.63 for 2014.  This strong level of demonstrated growth outpaces the market’s implied estimate of 2.84% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the price.  (See the full valuation)
EMN Chart

EMN data by YCharts

Wells Fargo and Company (WFC)

500px-Wells_Fargo_Bank.svgWells Fargo qualifies for either Defensive Investors or for Enterprising Investors.  In fact, the company passes all of the requirements of both investor types, which is a rare accomplishment.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Fifth Third Bancorp (FITB) and ModernGraham’s valuation of JP Morgan Chase (JPM).  From a valuation perspective, the company appears significantly undervalued after growing its EPSmg (normalized earnings) from $1.83 in 2010 to an estimated $3.56 for 2014.  This strong level of demonstrated growth outpaces the market’s implied estimate of 3.00% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the market price.  (See the full valuation)
WFC Chart

WFC data by YCharts

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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