5 Undervalued Companies for Value Investors with a High Beta – December 2014

There 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!

Joy Global Inc. (JOY)

Joy Global Inc. achieves the rare feat of passing all of the requirements of both the Defensive Investor and the Enterprising Investor, so neither investor type has any initial concerns with the company.  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 comparing it to other opportunities.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.89 in 2010 to an estimated $4.85 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 1.08% 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)

PulteGroup Inc. (PHM)

PulteGroup qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor has concerns with the lack of earnings stability or growth over the last ten years.  The Enterprising Investor is concerned by the lack of earnings stability over the last five years.  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 perspective, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $4.20 in 2010 to an estimated gain of $2.03 for 2014.  This level of earnings growth outpaces the market’s implied estimate of 0.56% 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)

LyondellBasell Industries NV (LYB)

LyondellBasell Industries is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the company’s short history post-bankruptcy, and the high PB ratio, while the Enterprising Investor has no initial concerns.  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 $0.93 in 2010 to an estimated $6.25 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 3.08% 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)

National Oilwell-Varco (NOV)

National Oilwell Varco qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only initial concern is the short dividend history while the company passes all of the Enterprising Investor’s requirements. Consequently, all value 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 side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.88 in 2010 to an estimated $5.53 for 2014, an overall growth rate of around 8.55% annually. National Oilwell Varco’s growth in its EPSmg demonstrates a long-term trend in the company’s earnings, a sight that value investors love to see. Overall, EPSmg has grown in each of the last five years, and it should be expected that growth will continue into the future. This level of demonstrated growth outpaces the market’s implied estimate of 2.81% earnings growth.  The ModernGraham valuation is based on an estimate of growth of 6.41%. As a result, it is clear that the market’s current pricing of National Oilwell Varco may be low, and therefore the ModernGraham conclusion is the company appears to be undervalued.  (See the full valuation)

Lincoln National Corp (LNC)

Lincoln National Corporation is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the lack of stable earnings over the last ten years, and the low level of growth in earnings over the last ten years while 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.  As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $1.25 in 2010 to an estimated $4.28 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 2.33% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price. (See the full valuation)

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.