10 Companies Benjamin Graham Would Invest In Today – December 2014

Out of the multitude of companies, which ones would legendary value investor Benjamin Graham buy today?  I’ve compiled ten great companies that fit the ModernGraham criteria, based on Benjamin Graham’s methods. The companies in this list pass the rigorous requirements of either the Defensive Investor or the Enterprising Investor and are undervalued by the market. To find more companies that meet these tests, be sure to check out the ModernGraham Valuation Index.

Assurant Inc. (AIZ)

Assurant Inc. qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the level of growth in earnings over the last ten years 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 undervalued after growing its EPSmg (normalized earnings) from $3.64 in 2010 to an estimated $5.93 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 1.54% 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)

B&G Foods Inc. (BGS)

B&G Foods Inc. qualifies for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the small size, low current ratio, short dividend history, and the high PEmg and PB ratios.  The Enterprising Investor is only concerned by 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 and comparing the company 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 $1.20 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 8.06% 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)

Dow Chemical Company (DOW)

Dow Chemical is suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor’s only concern is the insufficient level of earnings growth over the last ten years, while the Enterprising Investor’s only issue is with the high level of debt relative to the net current assets. However, these issues are not enough to deter either investor type from proceeding with further research. In fact, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

As for the valuation, the company has grown its EPSmg (normalized earnings) from $1.44 in 2010 to an estimated $2.40 for 2014. This demonstrated growth exceeds the market’s implied estimate of 5.33%. In fact, the demonstrated growth, after being discounted by a margin of safety, supports an estimate of 10.10% growth. As a result, the ModernGraham valuation model returns an estimate of intrinsic value well above the market price at this time, and the company appears to be undervalued by the market. Value Investors are therefore encouraged to proceed with further research to determine whether Dow Chemical is suitable for their own individual portfolios.  (See the full valuation on Seeking Alpha)

Eastman Chemical Company (EMN)

Eastman Chemical qualifies for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor has no initial concerns while the Enterprising Investor is only slightly concerned by the 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 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 $2.07 in 2010 to an estimated $5.65 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 3.05% 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)

Fifth Third Bancorp (FITB)

Fifth Third Bancorp qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the lack of earnings stability or growth 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 $0.02 in 2010 to an estimated $1.61 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 2.16% 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)

Ford Motor Company (F)

Ford continues to fare very well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the lack of earnings stability over the last ten years and the inconsistent dividend record over that time period, while the Enterprising Investor has no initial concerns. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from a loss of $1.15 in 2010 to an estimated gain of $1.87 for 2014. This is a fairly strong level of demonstrated growth which is well above the market’s implied estimate for earnings loss of 0.1% over the next 7-10 years. It is true that the company has seen somewhat flat EPSmg over the last couple of years, but it is critical for investors to have a longer frame of reference when considering a company’s long-term prospects. Here, the historical growth in EPSmg over the last five years is around 52.53% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but it is unrealistic that a company this strong would see negative growth over the long-term. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.  (See the full valuation on Seeking Alpha)

Helmerich & Payne Inc. (HP)

Helmerich & Payne is suitable for either the Defensive Investor or the Enterprising Investor.  In fact, the company passes all of the requirements of both investor types, which is a very rare accomplishment.  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.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.99 in 2010 to an estimated $5.58 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 3.11% 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)

Hess Corporation (HES)

Hess Corporation qualifies for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is only concerned by the low current ratio while the Enterprising Investor is only slightly concerned by the 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 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 $5.38 in 2010 to an estimated $7.75 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 1.06% 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)

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)

LyondellBasell Industries (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)

Disclaimer:  The author held a long position in Ford Motor Company (F) but did not hold a position in any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logos taken from the Wikipedia or the individual company’s website; this article is not affiliated with the company in any manner.