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Sunday, October 22, 2017

5 Speculative and Overvalued Companies to Avoid – October 2014


5The market is filled with companies with a lot of hype which are touted as great investments, but Benjamin Graham taught that intelligent investors must look past the hype and avoid speculating about a company’s future.  By using the ModernGraham Valuation Model, I’ve selected five of the most overvalued companies reviewed by ModernGraham. Each company has been determined to not 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, which is available for premium subscribers and is a great resource for selecting better opportunities.  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.

Darden Restaurants Inc. (DRI)

220px-Darden_logo.svgDarden Restaurants does not qualify for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned by the low current ratio, the lack of earnings growth over the last ten years, and the poor PEmg and PB ratios.  Likewise, the Enterprising Investor is concerned with the high level of debt relative to the current assets as well as the lack of earnings growth over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From purely a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $2.94 in 2011 to an estimated of $2.42 in 2015.  This demonstrated drop in earnings leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.  (See the full valuation)
DRI Chart

DRI data by YCharts

Perkin Elmer Inc. (PKI)

PKIPerkinElmer is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, the insufficient level of earnings growth over the last ten years, and the high PEmg ratio.  The Enterprising Investor has an issue with the level of debt relative to the net current assets and the lack of growth over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $1.72 in 2010 to an estimated $1.56 for 2014.  This level of demonstrated growth does not support the market’s implied estimate of 8.57% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.  (See the full valuation)
PKI Chart

PKI data by YCharts

Graham Holdings Company (GHC)

GrahamHoldingsGraham Holdings does not qualify for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor has concerns with the low current ratio, the insufficient earnings growth over the last ten years, and the high PEmg ratio.  The Enterprising Investor is concerned by the high level of debt relative to the current assets as well as the lack of earnings growth over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time.  From a valuation perspective, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $21.71 in 2010 to an estimated $21.66 for 2014.  This demonstrated lack of growth does not support the market’s implied estimate of 12.52% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.  (See the full valuation)
GHC Chart

GHC data by YCharts

Cincinnati Financial Corporation (CINF)

CINCINNATI FINANCIAL CORPORATION LOGOCincinnati Financial Corp does not qualify for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned by the lack of sufficient earnings growth over the last ten years, while the Enterprising Investor has an issue with the lack of earnings growth over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From a valuation side of things, the company appears overvalued after seeing its EPSmg (normalized earnings) drop from $3.02 in 2010 to only an estimated $2.33 for 2014.  This demonstrated drop in earnings does not support the market’s implied estimate of 5.73% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the market price.  (See the full valuation)
CINF Chart

CINF data by YCharts

Adobe Systems Inc. (ADBE)

Adobe_Systems_logo_and_wordmark.svgAdobe Systems Inc. is no longer suitable for either the Defensive Investor or the Enterprising Investor at this time.  The Defensive Investor has concerns with the low current ratio, lack of dividend payments, lack of sufficient earnings growth over the last ten years and the high PEmg and PB ratios.  The Enterprising Investor is concerned with the lack of dividend payments and lack of growth in earnings over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should seek other opportunities.  As for a valuation, the company appears significantly overvalued after seeing its EPSmg (normalized earnings) fall from $1.22 in 2010 to only an estimated $0.99 for 2014.  This demonstrated drop in earnings clearly does not support the market’s implied estimate of 29.39% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the market price.  (See the full valuation)
ADBE Chart

ADBE data by YCharts

What do you think?  Are these companies a bad opportunity for Intelligent 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.  Logos are taken from either the company page or Wikipedia for purposes of identifying the company only; ModernGraham has no affiliation with the companies.

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