5 Undervalued Companies to Research With a Low Beta – July 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 – July 2014!

Family Dollar Stores (FDO)

FamilydollarlogopngFamily Dollar qualifies for the Enterprising Investor but not the Defensive Investor. The Defensive Investor has concerns with the low current ratio and the high PEmg and PB ratios, but the company passes all of the Enterprising Investor’s requirements. 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 such as through a review of ModernGraham’s valuation of Dollar General (DG). As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.06 in 2010 to an estimated $3.26 in 2014. This level of demonstrated growth supports the market’s implied estimate of 5.81% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the 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

B&G Foods Inc. (BGS)

bg-foods-logoB&G Foods is intriguing to Enterprising Investors but does not qualify for the Defensive Investor.  The Defensive Investor has some major concerns and in fact the only requirements of the investor type which the company passes are the earnings stability and earnings growth.  The Enterprising Investor, on the other hand, only has an issue with the 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 comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.49 in 2010 to an estimated $1.22 for 2014.  This strong level of demonstrated growth outpaces the market’s implied estimate of 9.57% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value exceeding the market price.  (See the full valuation)
BGS Chart

BGS data by YCharts

Amgen Inc. (AMGN)

500px-Amgen.svgAmgen Inc. is suitable for Enterprising Investors but not for Defensive Investors.  The Defensive Investor has concerns with the lack of a long enough dividend record and the high PB ratio.  The Enterprising Investor’s only concern is with 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 comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Johnson & Johnson (JNJ) and ModernGraham’s valuation of Pfizer Inc. (PFE).  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $4.12 in 2010 to an estimated $6.40 for 2014.  This level of demonstrated growth more than supports the market’s implied estimate of 4.82% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s value investing formula, to return an estimate of intrinsic value above the price.  (See the full valuation)
AMGN Chart

AMGN data by YCharts

The TJX Companies (TJX)

tjx_logoThe TJX Companies qualify for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned with the low current ratio and the high PB ratio, but 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 and comparing it to other opportunities through a review of ModernGraham’s valuation of Nordstrom Inc. (JWN) and ModernGraham’s valuation of Urban Outfitters (URBN).  From a valuation side of things, the company appears undervalued after growing its EPSmg (normalized earnings) from $1.30 in 2011 to an estimated $2.69 for 2015.  This strong level of demonstrated growth outpaces the market’s implied estimate of 5.55% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.  (See the full valuation)
TJX Chart

TJX 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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