Feature Screens

5 Undervalued Dow Stocks to Research – August 2015

image (9)There are a number of great companies in the market today. By using the ModernGraham Valuation Model, I’ve selected the five most undervalued Dow stocks reviewed by ModernGraham which are suitable for the Defensive Investor or the Enterprising Investor according to the ModernGraham approach. This is a sample of the types of screens 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, including the companies which have been chosen in the past.

Travelers Companies (TRV)

500px-The_Travelers_Companies.svgTravelers Companies qualifies for both the Defensive Investor and the Enterprising Investor.  The company passes all of the requirements of both investor types, a rare accomplishment.  As a result, 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 other opportunities.  As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $5.25 in 2011 to an estimated $8.80 for 2015.  This level of demonstrated growth outpaces the market’s implied estimate of 1.61% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price.  (See the full valuation)

American Express Company (AXP)

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American Express passes the initial requirements of the Enterprising Investor but not the Defensive Investor. In fact, the company passes every requirement of the Enterprising Investor types, but the Defensive Investor is concerned by the high PB ratio. As a result, all Enterprising 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, it has grown its EPSmg (normalized earnings) from $3.11 in 2011 to an estimated $4.99 for 2015. This is a fairly strong level of demonstrated growth, and outpaces the market’s implied estimate for annual earnings growth of 3.43% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged around 12% annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that American Express is significantly undervalued at the present time. (See the full valuation)

Pfizer Inc. (PFE)

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Pfizer performs well in the ModernGraham model and is suitable for Enterprising Investors. The Defensive Investor is concerned with the insufficient earnings growth over the last ten years, along with the poor PB ratio, while the Enterprising Investor has no initial concerns. As a result, all Enterprising 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 valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $1.18 in 2011 to an estimated $2.03 for 2015. This is a strong level of growth and is well above the market’s implied estimate of only 4.25% annual earnings growth over the next 7-10 years.

Here, actual growth in EPSmg over the last several years has averaged nearly 14.4% annually, 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 estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time. (See the full valuation on Seeking Alpha)

JP Morgan Chase (JPM)

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JPMorgan Chase passes the initial requirements of both the Defensive Investor and the Enterprising Investor. In fact, the company passes every requirement of both investor types, which is a rare accomplishment indicative of the company’s strong financial position. 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, it has grown its EPSmg (normalized earnings) from $3.48 in 2011 to an estimated $5.09 for 2015. This is a fairly strong level of demonstrated growth, and outpaces the market’s implied estimate for annual earnings growth of 2.24% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged around 9.25% annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that JPMorgan Chase is significantly undervalued at the present time. (See the full valuation)

E. I. Du Pont De Nemours and Company (DD)

500px-DuPont.svgDu Pont should satisfy the Enterprising Investor, but not the Defensive Investor. The Defensive Investor is concerned with the low current ratio and high PB ratio, while the Enterprising Investor has no initial concerns. Therefore, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $2.99 in 2011 to an estimated $4.01 for 2015. This level of demonstrated growth is in line with the market’s implied estimate for earnings growth of 4.81% over the next 7-10 years. The ModernGraham valuation model, therefore, returns an estimate of intrinsic value falling within a margin of safety relative to the current price, indicating Du Pont is fairly valued at the present time. (See the full valuation)

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 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.  Company logos were taken from Wikipedia; ModernGraham has no affiliation with any of the companies mentioned.

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