5 Undervalued Companies with a High Beta – May 2014

20140530-054905-20945379.jpgThere are a number of great companies in the market today. By using the ModernGraham Valuation Model, I’ve selected the five undervalued companies reviewed by ModernGraham with the highest beta.  A company’s beta indicates the correlation at which its price moves in relation to the market.  A beta greater than 1 indicates a company is more volatile than the market.  Each company has been determined to be suitable for either the Defensive Investor or the Enterprising Investor according to the ModernGraham approach. This is a sample of one screen that is included in ModernGraham Stocks & Screens.  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.

With a high beta, Mr. Market may turn these companies around very quickly, so be sure to check them out in depth!

Gannett Co., Inc. (GCI)

500px-Gannett_logo_2011.svgGannett Co. has a beta of 2.3 and is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned with the low current ratio and the lack of earnings stability or growth over the last ten years.  The Enterprising Investor has a shorter time horizon, though, and only finds a concern with regard to the high level of debt relative to the net current assets.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the company.  From a valuation side of things, the company appears to be significantly undervalued after growing its EPSmg (normalized earnings) from -$3.75 in 2010 to an estimated $2.06 for 2014.  This solid level of demonstrated growth leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.  (See the full valuation here)
GCI Chart

GCI data by YCharts

Freeport-McMoRan (FCX)

500px-Freeport_McMoRan.svgWith a beta of 2.3, FreePort-McMoran is an interesting company in the ModernGraham valuation model.  It does not pass the requirements of the Defensive Investor, as it has not consistently paid dividends over the last ten years, and it has not shown earnings stability over the last ten years.  But it does pass the requirements of the Enterprising Investor, though it has a higher level of debt relative to current assets than the investor type likes to see.  As a result, Enterprising Investors should feel comfortable proceeding with their research.  From a valuation perspective, the ModernGraham valuation is affected significantly by the large earnings loss in 2008, which has caused the EPSmg (normalized earnings) figure for 2009 to be very low in relation to 2013.  As it stands, the EPSmg have grown from -$1.67 to $3.48, indicating a high level of growth that would appear to significantly outpace the market’s implied estimate of 0.67% earnings growth.  This has led the model to return an intrinsic value estimate that is well above the market price, and the overall result that the company is undervalued is supported by the valuation based on only 3% growth. (See the full valuation here)FCX Chart

FCX data by YCharts

Joy Global Inc. (JOY)

2012_JGI_logo_wikipediaJoy Global has a beta of 2.0 and is a rare company in that it has passed all of the requirements of both the Defensive Investor and the Enterprising Investor.  As such, it is suitable for either investor type, and value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.  From a valuation perspective, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $3.89 in 2010 to an estimated $4.90 for 2014.  This demonstrated level of growth is in line with the market’s implied estimate of 1.69% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the price.  (See the full valuation here)
JOY Chart

JOY data by YCharts

Eastman Chemical Co. (EMN)

200px-Eastman_Chemical_Company_logo.svgEastman Chemical Co., with a beta of 1.8, is suitable for both Defensive Investors and Enterprising Investors.  The Defensive Investor’s only concern is with the high PB ratio, while the Enterprising Investor’s concern lies with the high level of debt relative to the net current assets.  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 comparing it to other opportunities such as E I Du Pont de Nemours and Co. (DD) and Dow Chemical Corp. (DOW).  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.06 in 2010 to an estimated $5.64 for 2014.  This strong level of demonstrated growth surpasses the market’s implied estimate of 3.55% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.  (See the full valuation here)
EMN Chart

EMN data by YCharts

Aflac Inc. (AFL)

500px-Aflac.svgWith a beta of 1.7, Aflac is suitable for either the Defensive Investor or the Enterprising Investor, having passed all of the requirements of each 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.  Such research may include a review of ModernGraham’s valuation of Unum Group (UNM).  From a valuation perspective, the company appears strong, having grown its EPSmg (normalized earnings) from $3.01 in 2009 to $5.59 for 2013.  This is a level of demonstrated historical growth that significantly outpaces the market’s current implied estimate of only 1.25% earnings growth.  The ModernGraham valuation model accordingly returns an estimate of intrinsic value that is well above a margin of safety when compared to the market price.
AFL Chart

AFL data by YCharts

What do you think?  Are these companies a good value for Defensive Investors and Enterprising 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.

 

 

 

 

 


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