Feature Screens

5 Most Undervalued Companies for the Defensive Investor – April 2015

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.

Be sure to check out the history of this screen to find out which companies have been selected in the past!

CF Industries Holdings (CF)

CfindustrieslogoCF Industries Holdings Inc. passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The only issue the Defensive Investor has with the company is the lack of earnings stability over the last ten years, while the Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $7.10 in 2010 to $24.63 for 2014. This is a strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of only 1.73% annually over the next 7-10 years. In fact, the historical growth is nearly 50% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (See the full valuation on Seeking Alpha)

Hess Corporation (HES)

200px-Hess_Corporation_Logo.svgHess Corporation is suitable for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor’s only concern is the low current ratio, so the Enterprising Investor is willing to overlook concerns with the level of debt relative to the current assets.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $5.38 in 2010 to $8.75 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of only 0.14% 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)

Yahoo! Inc. (YHOO)

200px-Yahoo!_logo.svgYahoo Inc. passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The only issue for both investor types is the lack of dividends. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, Yahoo Inc. has grown its EPSmg (normalized earnings) from $0.57 in 2010 to $3.64 for 2014. This is a very strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of only 1.73% over the next 7-10 years. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (See the full valuation on Seeking Alpha)

Twenty-First Century Fox (FOXA)

220px-21st_Century_Fox_logo.svgTwenty-First Century Fox Inc. is suitable for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor is only concerned by the lack of earnings stability over the last ten years, while the Enterprising Investor’s only concern is the level of debt relative to the net current assets.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.66 in 2011 to an estimated $2.62 for 2015.  This level of demonstrated growth is greater than the market’s implied estimate of 2.33% 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)

Eastman Chemical Company (EMN)

200px-Eastman_Chemical_Company_logo.svgEastman Chemical Company is suitable for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor’s only concern is the low current ratio, while the Enterprising Investor is only concerned with the level of debt relative to the net current assets.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.07 in 2010 to $5.02 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 3.26% 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)

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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