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5 Speculative and Overvalued Companies to Avoid – July 2015

5The market is filled with companies with a lot of hype which are touted as great investments, but Benjamin Graham taught that intelligent investors must look past the hype and avoid speculating about a company’s future.  By using the ModernGraham Valuation Model, I’ve selected five of the most overvalued companies reviewed by ModernGraham. Each company has been determined to not 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, which is available for premium subscribers and is a great resource for selecting better opportunities.  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. Each company suitable for the Defensive Investor is also suitable for Enterprising Investors.

Level 3 Communications Inc. (LVLT)

220px-Level3_Logo.svgLevel 3 Communications Inc. does not qualify for either the Defensive Investor and the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, lack of dividends, high PEmg and PB ratios, as well as the insufficient earnings stability or growth over the last ten years.  The Enterprising Investor is concerned with the level of debt relative to the current assets, the lack of earnings stability over the last five years, and the lack of dividends.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a speculative attitude.  As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from a loss of $5.61 in 2011 to an estimated gain of $0.10 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 273.67% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value falling below the price.  (See the full valuation)

Mallinckrodt PLC (MNK)

mallinckrodt logoMallinckrodt PLC does not qualify for either the Defensive Investor and the Enterprising Investor.  The Defensive Investor is concerned with the short history as a stand alone company, lack of dividends, and the high PEmg and PB ratios.  The Enterprising Investor is concerned with the level of debt relative to the net current assets, the lack of dividends, and the lack of earnings stability over the last five years.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a speculative attitude.  As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $0.87 in 2011 to an estimated $1.13 for 2015.  This level of earnings growth does not support the market’s implied estimate of 51.51% annual earnings growth over the next 7-10 years, and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value falling below the price.  (See the full valuation)

McGraw Hill Financial Inc. (MHFI)

145px-McGraw_Hill_Financial_New_LogoMcGraw Hill Financial Inc. does not qualify for either the Defensive Investor and the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios, as well as the insufficient earnings stability or growth over the last ten years.  The Enterprising Investor is concerned with the level of debt relative to the current assets and the lack of earnings stability over the last five years.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a speculative attitude.  As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.70 in 2011 to only an estimated $2.72 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 15.13% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value falling below the price.  (See the full valuation)

Mondelez International (MDLZ)

220px-Mondelez_International.svgMondelez is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the the low current ratio, the insufficient earnings growth over the last ten years, and the high PEmg and PB ratios.  The Enterprising Investor is concerned with the lack of earnings growth over the last five years and the level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $1.98 in 2011 to only an estimated $1.68 for 2015.  This lack of earnings growth does not support the market’s implied estimate of 7.96% annual earnings growth over the next 7-10 years, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.  (See the full valuation)

Waste Management Inc. (WM)

220px-Waste_Management_Logo.svgWaste Management does not qualify for either the Defensive Investor and the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios, as well as the insufficient earnings growth over the last ten years.  The Enterprising Investor is concerned with the level of debt relative to the current assets and the lack of earnings growth over the last five years.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a speculative attitude.  As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $2.05 in 2011 to an estimated $1.97 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 8.08% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value falling below the price.  (See the full valuation)

What do you think?  Are these companies a bad opportunity for Intelligent 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.  Logos are taken from either the company page or Wikipedia for purposes of identifying the company only; ModernGraham has no affiliation with the companies.

 

One thought on “5 Speculative and Overvalued Companies to Avoid – July 2015

  1. You guys might want to do a little DD on MNK. With a projected of cash of around 1 Billion in cash each year they are sure to acquire more companies and or give shareholders a dividend. Tony

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