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5 Undervalued Companies to Research With a Low Beta – June 2014

imageThere 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 lowest beta.  A company’s beta indicates the correlation at which its price moves in relation to the market.  A beta less than 1 indicates a company is less 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 low beta, Mr. Market may not hit these companies as harshly in a downturn, so be sure to check them out in depth!  If you’re interested in companies with a high beta instead, check out 5 Undervalued Companies with a High Beta – May 2014!

Family Dollar Stores (FDO)

FamilydollarlogopngWith a very low beta of 0.3, Family Dollar Stores qualifies for the Enterprising Investor after passing all five of the investor type’s requirements.  The company does not qualify for the Defensive Investor at this time due to the low current ratio and the high PB ratio.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company as well as some of its competitors for comparative purposes, including a review of ModernGraham’s valuation of Dollar General (DG) and ModernGraham’s valuation of Walmart Stores (WMT).  From a valuation side of things, the company appears undervalued after growing its EPSmg (normalized earnings) from $2.06 in 2010 to an estimated $3.41 for 2014.  This strong level of demonstrated growth outpaces the market’s implied estimate of 4.25% 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)
FDO Chart

FDO data by YCharts

UnitedHealth Group (UNH)

UnitedHealth_Group_logo (1)UnitedHealth Group has a low beta of 0.6 and is suitable for both Defensive Investors and Enterprising Investors.  The company passes all of the Defensive Investor’s requirements except the current ratio, and even though the Enterprising Investor is concerned with the high level of debt relative to current assets, the company qualifies for both investor types because it is suitable for Defensive Investors.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.36 in 2010 to an estimated $5.24 in 2014.  This level of demonstrated growth exceeds the market’s implied estimate of 3.11% earnings growth and leads the ModernGraham to calculate an estimate of intrinsic value that is well above the price. (See the full valuation)
UNH Chart

UNH data by YCharts

Cigna Corporation (CI)

200px-Cigna_logo.svgCigna Corp is an interesting company for both Defensive Investors and Enterprising Investors, and has a beta of only 0.7.  The company passes all of the requirements of either investor type, though it should be noted that the dividend rate is extremely low.  All value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing the company to other opportunities.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.31 in 2009 to $5.18 in 2013.  This demonstrated level of growth outpaces 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)
CI Chart

CI data by YCharts

HCP, Inc. (HCP)

logoWith a beta of 0.7, HCP Inc. for now qualifies for the Enterprising Investor, which is a rather rare achievement for a REIT as normally the level of debt present eliminates them from contention.  In this case, though, the company’s current assets are high enough this quarter to push it into contention for investment.  For the Defensive Investor, the company’s PEmg ratio is too high and the current ratio is not high enough to overcome that burden.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  From a valuation standpoint, the company appears to be undervalued, having grown its EPSmg (normalized earnings) from $0.57 in 2009 to $1.54 for 2013.  This demonstrated level of growth is above the market’s implied estimate of 8.9% earnings growth, and the ModernGraham valuation model has returned an estimate of intrinsic value that is higher than the market price. (See the full valuation)HCP Chart

HCP data by YCharts

Whole Foods Market (WFM)

500px-Whole_Foods_Market_logo.svgWhole Foods Market is suitable for Enterprising Investors but not Defensive Investors.  The company’s beta is only 0.7.  For Defensive Investors, the company’s current ratio is too low, it does not have a strong enough dividend history, and its PEmg and PB ratios are too high.  The company passes all of the requirements of the Enterprising Investor.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company while also comparing it to other opportunities.  From a valuation perspective, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $0.56 in 2010 to an estimated $1.35 for 2014.  This demonstrated level of growth supports the market’s implied estimate of 14.51% 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).
WFM Chart

WFM 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.

 

 

 

 

 

 

 

One thought on “5 Undervalued Companies to Research With a Low Beta – June 2014

  1. Out of the lot I like family dollar store out of there. Still lots of room for good growth there. I like whole foods too but I would wait a few months to see where their future is going.

    Thanks for the article! Good Day and grind On!

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