5 Outstanding Dow Components – February 2014

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 Components reviewed by ModernGraham which are suitable for the Defensive Investor according to the ModernGraham approach. This is a sample of the types of screens included in ModernGraham Stocks & Screens, our monthly publication.  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.

Value investors seeking to follow Benjamin Graham’s methods may also wish to review some other companies that satisfy the ModernGraham requirements while proceeding with further research of all of the following companies:

Intel Corp (INTC)

500px-Intel-logo.svgIntel Corp is a very strong company, having passed every single requirement of both the Defensive and Enterprising Investors.  In addition, the company appears to be undervalued significantly by Mr. Market.  The market is implying only 1.78% growth in the earnings, but historically the growth rate is much higher.  The EPSmg (normalized earnings) has grown from $1.06 in 2008 to an estimated $1.99 in 2013.  Further, the PEmg is only 12.21, which should be low enough to attract the attention of value investors.  As a result, potential investors should be intrigued by Intel and proceed with further research of the company.  We last reviewed this company on November 6, 2013 (look for an updated valuation in the next couple weeks), and valued it at $76.44.  Since then, it has risen about 3%, but has returned to about the same price with the recent downturn in the market the last week.

JP Morgan Chase (JPM)

500px-J_P_Morgan_Chase_Logo_2008_1.svgJP Morgan Chase is a very intriguing financial company, based on its earnings growth over the last 10 years.  The company passes all of the tests required for both the Defensive and Enterprising Investor because it has strong financials.  From a valuation perspective, the company fares well in the ModernGraham valuation model after achieving significant growth in EPSmg (normalized earnings) of $2.62 in 2008 to an estimated $4.48 in 2013.  The market is currently implying further growth of only 2.05%, which should be easily beatable by such a large bank.  As a result, investors of all kinds should be interested in JP Morgan Chase and should do further research to determine whether it would be a suitable investment for them individually.  The last ModernGraham valuation of JP Morgan Chase was at $143.27 on November 11, 2013.  It has since risen in value 4.7%, but it still appears to be greatly undervalued.

Chevron Corporation (CVX)

500px-Chevron_Logo.svgChevron passes almost all of the tests for both the defensive and enterprising intelligent investors, with the sole exception being that its current ratio is not quite strong enough for the defensive investor.  As a result, Chevron deserves more thorough research from potential investors.  From a valuation perspective, it appears the company may be undervalued due to very high earnings growth over the last few years that may not be adequately reflected by the market.  For example, the company has grown its EPSmg (normalized earnings) from $8.10 in 2009 to an estimated $11.69 for 2013.  Meanwhile the market’s current implied growth rate estimate is 0.51%.  Clearly the historical earnings growth outpaces the market’s estimate, and as a result the ModernGraham valuation model returns an intrinsic value well above the market price.  Chevron was last reviewed on October 31, 2013 (it will be reviewed again in the next couple of weeks), and has dropped in price about 7.5% since then, indicating that it is further undervalued.

Verizon Communications Inc. (VZ)

500px-Verizon_logo.svgVerizon Communications appears to be a solid opportunity worthy of further research by both Defensive Investors and Enterprising Investors.  The only significant concern is that the EPS for 2013 is estimated to be down significantly from the last few years; however, it does not drag the EPSmg (normalized earnings) down enough to negatively affect the result.  The company passes all of the requirements for the Defensive Investor, proving it has strong financials, and it also passes all of the requirements for the Enterprising Investor.  As a result, these types of investors should pay close attention to the company and do further research to determine if it is suitable for their individual portfolios, keeping in mind the 7 Key Tips to Value Investing.  From a valuation standpoint, the company fares well in the ModernGraham valuation model after having grown its EPSmg from $2.16 in 2008 to an estimated $3.22 in 2013.  Since this level of proven historical growth outpaces the growth implied by the market, it is possible Verizon is undervalued.  Verizon was last reviewed on November 18, and has dropped about 7.2% in price since then.  As a result, it appears to be an even better opportunity now.

UnitedHealth Group Inc. (UNH)

UnitedHealth_Group_logoUnitedHealth is a very attractive company based on both its financials and its valuation.  The company passes most of the tests of the Defensive Investor and the Enterprising Investor, with its only downside the poor current ratio.  The company has a strong dividend history and stable earnings history.  From a valuation standpoint, the company’s growth in EPSmg (normalized earnings) from $2.77 in 2008 to an estimated $4.93 for 2013 is impressive.  As a result of this strong history of growth, the ModernGraham valuation model looks favorably upon UnitedHealth and the company appears to be undervalued.  Investors should pay close attention to UnitedHealth and continue with further evaluation of the company when considering making an investment, while keeping in mind the 7 Key Tips to Value Investing.  UnitedHealth Group was reviewed on November 15, and is currently down only 0.8%, so it remains a solid value.

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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