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5 Undervalued Dow Components – May 2014

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 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, 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.

This month, Caterpillar (CAT) has been removed from the list and Cisco Systems added.

Intel Corp (INTC)

500px-Intel-logo.svgIntel 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 2.30%, 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. (See the full valuation)
INTC Chart

INTC data by YCharts

JP Morgan Chase (JPM)

500px-J_P_Morgan_Chase_Logo_2008_1.svg

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).  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 1.80%, leading the ModernGraham valuation model to return an intrinsic value estimate that is well above the market price. (See the full valuation)
JPM Chart

JPM data by YCharts

Chevron Corporation (CVX)

500px-Chevron_Logo.svgChevron 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 1.15%, 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. (See the full valuation)
CVX Chart

CVX data by YCharts

UnitedHealth Group Inc. (UNH)

UnitedHealth_Group_logoUnitedHealth 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 3.35% 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. (See the full valuation)
UNH Chart

UNH data by YCharts

Cisco Systems Inc. (CSCO)

500px-Cisco_logo.svgCisco Systems Inc. is a great company for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor’s only concern is the short dividend history while the company passes all of the requirements of the Enterprising Investor.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the company and its competitors through a review of ModernGraham’s valuation of Microsoft (MSFT).  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.20 in 2010 to an estimated $1.63 for 2014.  This demonstrated level of growth surpasses the market’s implied estimate of only 2.72% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the price.  (See the full valuation)
CSCO Chart

CSCO data by YCharts

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.

6 thoughts on “5 Undervalued Dow Components – May 2014

  1. Cisco stock price has gone no-where since February 2014; probably due to several factors, including poor sales/market performance in China and emerging markets; the heartbleed virus/spyware crisis last month and general exhaustion in the IT growth market. Please give me some counter arguments to overcome this malaise at Cisco, which seems set to continue for another 12 to 18 months at best. I like the company and Mr. Chambers, CEO, is to be much admired, but this sector and its leader, Cisco, seems to have run out of upward momentum, in both earnings and sales growth.

    1. Ronald,

      Thanks for the comment! I don’t have any counter arguments for you because I am not concerned with how the market views the company. Right now the demonstrated earnings history shows the company to be valued higher than the market price. Until the earnings come in that would result in a different valuation, any discussion on how the heart bleed virus will affect the company is mere speculation.

      I expect a company as large as Cisco will be able to overcome any short term issues such as this. A value investor is interested in the long term prospects and as it stands today, Cisco is significantly undervalued.

      Anyone else have thoughts on this?

      1. Love, own and keep purchasing all of these. JPM was “on sale” this week down almost 9% from last month, thats my kind of bargain shopping!

        I have been looking for an MG Toyota valuation but can’t find one, am I not looking in the right place?

          1. Fantastic.

            Keep up the good work, this is the best “stock” website I have found. This is the starting point for all of my research now…

            I am interested in the monthly reports but I never received my sample when I signed up a couple of months ago, is there a way I can get February or March’s?

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