5 Outstanding Dow Components – March 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.

This month, Verizon (VZ) has dropped off the list, and International Business Machines (IBM) has been added.

Intel Corp (INTC)

Intel Corp. fares extremely well in the ModernGraham requirements, passing every test of both the Defensive Investor and the Enterprising Investor.  This is a company that appears to present low risk of financial strife and may present relative safety of principal.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the opportunity.  An example of further research would be to look into some competitors, such as by a review of ModernGraham’s valuation of Hewlett-Packard Company (HPQ) and ModernGraham’s valuation of Texas Instruments (TXN).  From a valuation standpoint, the company looks very strong, having grown its EPSmg (normalized earnings) from $0.95 in 2009 to $2.00 for 2013.  This level of growth easily supports the market’s implied estimate for growth of 1.91%, and the ModernGraham valuation model returns an intrinsic value that exceeds the current market price.  Therefore, the company appears to be undervalued at the current time. (Click here for the full valuation)

JP Morgan Chase (JPM)

JP Morgan Chase is a very strong candidate for both the Defensive Investor and the Enterprising Investor.  Despite the financial crisis, the company passes all of the requirements of either investor type.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods, should feel very comfortable proceeding with further research into the company to determine whether it would fit in their individual portfolios.  This research should include a review of some competitor companies, through a review of ModernGraham’s valuation of Wells Fargo (WFC) or other companies listed in ModernGraham Stocks & Screens.  From a valuation perspective, the company appears strong after growing its EPSmg (normalized earnings) from $2.51 in 2009 to $4.41 for 2013.  This solid level of demonstrated historical growth outpaces the market’s current implied estimate for growth of 2.43%, leading the ModernGraham valuation model to return an intrinsic value estimate that is well above the market price. (Click here for the full valuation)

Chevron Corporation (CVX)

Chevron Corporation remains suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s only issue with the company is the low current ratio, and the Enterprising Investor’s only issue is the high level of debt relative to the company’s current assets.  The company passes every other requirement of the two investor types.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research, including a review of ModernGraham’s valuation of Exxon Mobil (XOM), and ModernGraham’s valuation of ConocoPhillips (COP).  From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $8.09 in 2009 to $11.58 for 2013.  This is a solid level of growth that outpaces the market’s implied estimate of earnings growth of 0.71%, and the ModernGraham valuation model accordingly returns an estimate of intrinsic value that surpasses the market price by more than our margin of safety.  Therefore, the company appears to be undervalued presently. (Click here for the full valuation)

International Business Machines (IBM)

International Business Machines has exhibited outstanding growth in its earnings over the last 10 years, which is shown in the rise in EPSmg (normalized earnings) from $7.09 in 2008 to an estimated $13.66 in 2013.  This sort of growth leads to a very high intrinsic value using ModernGraham’s valuation model derived from an updated version of Benjamin Graham’s formula in The Intelligent Investor.  However, investors seeking to follow Graham’s stringent requirements for Defensive Investors or Enterprising Investors should stay away from IBM at this time.  The company simply holds too much debt to qualify as a quality investment and holds enough risk to be considered speculative at this time.  If the current ratio improves to over 1.5, then this company would become significantly more interesting to Enterprising Investors. (Click here for the full valuation)

UnitedHealth Group Inc. (UNH)

UnitedHealth Group is suitable for the Defensive Investor, and by default is also suitable for the Enterprising Investor.  The company passes all of the requirements of the Defensive Investor except the current ratio requirement.  The Enterprising Investor normally would like to see lower debt levels relative to the current assets, but is willing to overlook that in this case because the company passes so many requirements for the Defensive Investor.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the company.  Such research should also include a review of other companies that pass these requirements, through a review of ModernGraham Stocks & Screens.  As for a valuation, the company has grown its EPSmg (normalized earnings) from $2.77 in 2008 to $4.95 for 2013.  This is a solid level of growth that outpaces the market’s implied estimate for growth of only 3.59% and leads the ModernGraham valuation model to return an intrinsic value that is greater than the market price.  As a result, the company appears to be undervalued at this time. (Click here for 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.