Feature Screens

5 Undervalued Companies to Research with a Low Beta – September 2014

imageThere are a number of great companies in the market today. By using the ModernGraham Valuation Model, I’ve selected the five undervalued companies reviewed by ModernGraham with the lowest beta.  A company’s beta indicates the correlation at which its price moves in relation to the market.  A beta less than 1 indicates a company is less volatile than the market.  Each company has been determined to be suitable for either the Defensive Investor or the Enterprising Investor according to the ModernGraham approach. This is a sample of one screen that is included in ModernGraham Stocks & Screens.  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.

With a low beta, Mr. Market may not hit these companies as harshly in a downturn, so be sure to check them out in depth!  If you’re interested in companies with a high beta instead, check out 5 Undervalued Companies with a High Beta – September 2014!

Dollar Tree, Inc. (DLTR)

logo (2)Dollar Tree is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor has concerns with the lack of dividend payments and the high PEmg and PB ratios.  The Enterprising Investor’s only initial concern is with the lack of dividend payments.  As a result, Enterprising 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 including a review of ModernGraham’s valuation of Dollar General (DG) and ModernGraham’s valuation of Family Dollar Stores (FDO).  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.14 in 2010 to an estimated $2.65 for 2014. This level of demonstrated growth outpaces the market’s implied estimate of 6.04% 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)
DLTR Chart

DLTR data by YCharts

United Health Group (UNH)

UnitedHealth_Group_logo (1)UnitedHealth Group is suitable for the Defensive Investor and therefore is also suitable for the Enterprising Investor. The Defensive Investor’s only initial concern is the low current ratio, and the Enterprising Investor is willing to overlook concerns about the level of debt relative to the 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. As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.36 in 2010 to an estimated $5.24 for 2014. This level of demonstrated growth outpaces the market’s implied estimate of 3.53% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price. (See the full valuation)
UNH Chart

UNH data by YCharts

HCP, Inc. (HCP)

logoHCP Inc. is a rare REIT which qualifies for the Defensive Investor and thus also the Enterprising Investor.  The Defensive Investor’s only concern at this time is the low current ratio and the Enterprising Investor is willing to overlook concerns regarding the level of debt relative to the current assets because the Defensive Investor is satisfied.  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.  As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $0.66 in 2010 to an estimated $2.12 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 5.52% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price.  (See the full valuation)
HCP Chart

HCP data by YCharts

Petsmart Inc. (PETM)

header-logo_no_tagPetsmart qualifies for the Enterprising Investor but not the Defensive Investor. The Defensive Investor has concerns with the low current ratio and the high PB ratio. The Enterprising Investor has no issues presently as the company passes all of the investor type’s requirements. As a result, Enterprising 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. From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.75 in 2011 to an estimated $3.67 for 2015. This level of demonstrated growth is greater than the market’s implied estimate of 5.27% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above than the price.  (See the full valuation)
PETM Chart

PETM data by YCharts

The TJX Companies (TJX)

tjx_logoThe TJX Companies qualify for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned with the low current ratio and the high PB ratio, but the company passes all of the requirements of the Enterprising Investor.  As a result, Enterprising 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 Nordstrom Inc. (JWN) and ModernGraham’s valuation of Urban Outfitters (URBN).  From a valuation side of things, the company appears undervalued after growing its EPSmg (normalized earnings) from $1.30 in 2011 to an estimated $2.69 for 2015.  This strong level of demonstrated growth outpaces the market’s implied estimate of 5.55% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.  (See the full valuation)
TJX Chart

TJX data by YCharts

What do you think?  Are these companies a good value for Defensive Investors and Enterprising 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 did not hold a position in any 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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