10 Companies Benjamin Graham Would Invest In Today – January 2015

10 Ben Graham CompaniesOut 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.

Aflac Inc. (AFL)

500px-Aflac.svgAflac performs extremely well in the initial stages of the analysis, passing all of the requirements of both the Enterprising Investor and the Defensive Investor. Any value investor following the ModernGraham approach based on Benjamin Graham’s teachings should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

To determine an estimate of the intrinsic value, one must consider the company’s earnings. Here, the company has grown its EPSmg (normalized earnings) from $3.65 in 2010 to an estimated $5.95 for 2014. This is a strong level of growth, approximately 12.55% each year. Even adjusting for a margin of safety to assume the company will not do as well in the future, a conservative growth estimate may be around 9.42%, which is well above the market’s implied forecast of only 0.74% earnings growth over the next 7-10 years. The company would have to see a significant slowdown in growth in order to be valued at the market’s current price. As a result, the ModernGraham valuation model returns an estimate of intrinsic value well above the price, supporting a clear conclusion that the company is significantly undervalued. All value investors are therefore encouraged to proceed with further research to determine whether Aflac is suitable for their own individual portfolios.  (See the full valuation on Seeking Alpha)

American International Group Inc. (AIG)

220px-AIG_logo.svgAmerican International Group 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 and the inconsistent dividends, 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 a loss of $158.11 in 2010 to an estimated gain of $5.79 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 0.2% 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)

Capital One Financial (COF)

500px-Capital_One_Financial_logo.svgCapital One Financial 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 $3.20 in 2010 to $6.93 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 1.35% 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)

Chevron Corporation (CVX)

500px-Chevron_Logo.svgChevron Corporation passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only concern is the low current ratio while the Enterprising Investor is willing to overlook concerns because the company passes the more conservative Defensive Investor requirements. As a result, 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.

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 $8.58 in 2010 to an estimated $11.38 for 2014. This is a fairly strong level of demonstrated growth which is well above the market’s implied estimate for earnings growth of 0.81% over the next 7-10 years. In fact, the historical growth is around 6.53% 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, and therefore returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (See the full valuation on Seeking Alpha)

Deere & Company (DE)

500px-John_Deere_logo.svgDeere & Company passes the initial requirements of both the Defensive Investor and the Enterprising Investor. In fact, the company receives a perfect score for both investor types, a rare accomplishment which indicates the company is in a very strong financial position. As a result, value 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 $3.71 in 2010 to $8.00 for 2014. This is a very strong level of demonstrated growth which is well above the market’s implied estimate for earnings growth of only 1.25% over the next 7-10 years. In fact, the historical growth is around 23.11% 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, and therefore returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (See the full valuation on Seeking Alpha)

Mattel Inc. (MAT)

200px-Mattel-brand.svgMattel 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 $1.52 in 2010 to an estimated $2.12 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 3.04% 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_Logo.svgNational Oilwell Varco passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only concern at this initial stage is the short dividend history while the Enterprising Investor has no issues. As a result, value 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 $3.88 in 2010 to $5.48 for 2014. This is a very strong level of demonstrated growth which is well above the market’s implied estimate for earnings growth of only 1.85% over the next 7-10 years. In fact, the historical growth is around 8.25% 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, and therefore returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (See the full valuation on Seeking Alpha)

People’s United Financial Inc. (PBCT)

PeoplesUnitedBankPeople’s United Financial qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the high PEmg ratio, while the company passes all of the Enterprising Investor’s requirements.  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 undervalued after growing its EPSmg (normalized earnings) from $0.34 in 2010 to an estimated $0.71 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 6.2% 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)

PulteGroup Inc. (PHM)

logo (1)PulteGroup performs quite well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the lack of earnings or dividend stability over the last ten years and the low earnings growth over that period, while the Enterprising Investor is only concerned by the lack of earnings stability over the last five years. 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 $4.19 in 2010 to an estimated gain of $1.98 for 2014. This is a very strong level of demonstrated growth which is well above the market’s implied estimate of only 0.93% annual earnings growth over the next 7-10 years. Here, the historical growth in EPSmg over the last five years is around 29.43% per year, which is clearly unsustainable over a long period of time. As a result, the ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur. The ModernGraham estimate is capped at 15% annual growth, which is still significantly higher than the market estimate. A significant slowdown would have to occur to justify a price as low as the market is demonstrating. 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)

SLM Corporation (SLM)

Sallie_Mae_logo_2009SLM Corporation qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor has concerns with the company’s lack of earnings or dividend stability 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.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.15 in 2010 to an estimated $1.57 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of negative 1.45% 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 Deere & Company (DE) 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.


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