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ModernGraham

Devoted to the study and modernization of the theories of Benjamin Graham and Warren Buffett.

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Wednesday, February 22, 2017

My Personal Holdings

Personal Holdings

I am often asked if I utilize the methods I teach here on ModernGraham, and the answer is yes.  I fully believe that Benjamin Graham’s methodology can be used in the market today, especially after taking time to analyze each one of his ideas and modernize it as needed.  The ModernGraham method can be a great way to narrow down investment opportunities to the strongest companies, and then a little bit of further research can help one determine in which companies to invest.

This series of posts looks at each of my personal holdings, putting them through a full ModernGraham valuation and adding a level of further research to provide rationale as to why I selected the company for my portfolio.

Allocations & Goals

Overall, the goal of this portfolio is to provide long-term growth to maximize retirement savings for my wife and me.  With that in mind, I strive to select companies that I believe will: (1) meet the ModernGraham requirements for the Enterprising Investor; (2) be rated as undervalued by the ModernGraham valuation model; and (3) qualitatively appear to have a long-term business strategy that will generate steady results for an extended period of time.

With regard to allocations, Benjamin Graham taught that intelligent investors should aim to have portfolios invested 50% in equities and 50% in bonds during a normal market time, and adjust those percentages according to the individual investor’s situation and sentiment regarding the market as a whole.  Graham suggested the range allocable to either asset type should be 25-75% of the full portfolio.

At this time, based on Mr. Market’s Mental State, I believe there is some potential for equity market appreciation in price, but the market does not appear to be significantly undervalued.  As a result, my equities holdings total more than 50% but less than 75% of the total portfolio.

Out of concerns for diversification, I aim to limit each equity holding to 10% of the portfolio with no more than 20% allocated to any particular industry.

My Current Holdings

Primary Holdings

Apple Inc. (AAPL)

Summary from latest valuation in January 2017

Apple Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, poor dividend history, and the high PB ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $4.74 in 2013 to an estimated $7.98 for 2017. This level of demonstrated earnings growth outpaces the market’s implied estimate of 3.27% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Apple Inc. revealed the company was trading above its Graham Number of $65.98. The company pays a dividend of $2.18 per share, for a yield of 1.8% Its PEmg (price over earnings per share – ModernGraham) was 15.03, which was below the industry average of 28.12, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-15.74.

Coach Inc. (COH)

Summary from latest valuation in August 2016

Coach Inc is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings growth over the last ten years, and the poor dividend history, and the high PB ratio. The Enterprising Investor is only concerned with the lack of earnings growth over the last five years. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $2.82 in 2012 to an estimated $2.24 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 4.99% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Coach Inc revealed the company was trading above its Graham Number of $19.23. The company pays a dividend of $1.35 per share, for a yield of 3.3%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 18.48, which was below the industry average of 49.91, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $0.77.

Deere & Co. (DE)

Summary from latest valuation in June 2016

Deere & Company qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position. . 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 should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $5.77 in 2012 to an estimated $6.24 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 2.3% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

Dover Corporation (DOV)

Summary from latest valuation in July 2016

Dover Corp qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $3.94 in 2012 to an estimated $4.56 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 3.47% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

Ford Motor Company (F)

Summary from latest valuation in January 2016

Ford Motor Company qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings growth or stability over the last ten years, and the inconsistent dividend history.  The Enterprising Investor has no initial concerns. As a result, all Enterprising 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 to be undervalued after growing its EPSmg (normalized earnings) from $1.30 in 2011 to an estimated $1.60 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.29% annual earnings loss over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

Invesco Ltd (IVZ)

Summary from latest valuation in July 2016

Invesco Ltd. qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $1.3 in 2012 to an estimated $2.15 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.37% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

People’s United Financial Corp (PBCT)

Summary from latest valuation in June 2016

People’s United Financial, Inc. qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position. . The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $0.51 in 2012 to an estimated $0.83 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 4.97% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

Western Digital Corp (WDC)

Summary from latest valuation in October 2015

Western Digital Corporation qualifies for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor is only concerned with the short dividend history.  The Enterprising Investor has no initial concerns.  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.

As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $4.74 in 2012 to an estimated $5.98 for 2016.  This level of demonstrated earnings growth supports the market’s implied estimate of 1.98% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

Western Refining Inc. (WNR)

Summary from latest valuation in June 2016

Western Refining, Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, insufficient earnings stability over the last ten years, and the poor dividend history. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $1.03 in 2012 to an estimated $3.13 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.97% annual earnings loss over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

WestRock Co (WRK)

Summary from latest valuation in August 2016

WestRock Co qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. 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 should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $1.97 in 2012 to an estimated $3.02 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.98% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into WestRock Co revealed the company was trading below its Graham Number of $48.57. The company pays a dividend of $1.45 per share, for a yield of 3.3%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 14.46, which was below the industry average of 53.08, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-38.4.

iShares iBoxx $ High Yid Corp Bond (HYG)

No individual valuation completed – yet.

iShares IBoxx $ Invest Grade Corp Bd Fd (LQD)

No individual valuation completed – yet.

iShares Lehman 10-20 Yr Tresry Bond (TLH)

No individual valuation completed – yet.

Minor Holdings (very small positions)

Berkshire Hathaway (BRK/B)

Summary from latest valuation in August 2015

Berkshire Hathaway Inc. is not suitable for the more conservative Defensive Investor or the Enterprising Investor. Both investor types are turned off by the lack of dividends. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should proceed only with a cautious and speculative attitude.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $4.15 in 2011 to an estimated $7.22 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 5.52% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

Walt Disney Company (DIS)

Summary from latest valuation in November 2014

After reviewing the data, it is clear that conservative value investors may wish to seek other opportunities. The Defensive Investor is concerned with the low current ratio in combination with the high PEmg and PB ratios, while the Enterprising Investor has concerns with the high level of debt relative to the current assets. As a result, both investor types would find the company to be too risky to proceed. That said, any investors willing to speculate about the future of the company may go ahead with the next step of the analysis, which is a determination of the company’s intrinsic value.

When calculating an estimate of intrinsic value, it is important to consider the historical earnings results along with the market’s implied estimate for future growth. Here, the company has grown its EPSmg (normalized earnings) from $2.01 in 2010 to an estimated $3.42 for 2014. This level of demonstrated growth is fairly strong, and is within a margin of safety relative to the market’s implied estimate of 8.82%. As a result, the company appears to be fairly valued at the present time.

Home Depot (HD)

Summary from latest valuation in November 2015

Home Depot Inc. does not qualify for either the Enterprising Investor or the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, and the high PEmg and PB ratios.  The Enterprising Investor is concerned by the level of debt relative to the current assets.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time or proceed with a cautious speculative attitude.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.01 in 2012 to an estimated $4.33 for 2016.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 10.11% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.