Feature Screens

5 Undervalued Companies with a Low Beta – August 2015

imageThere are a number of great companies in the market today. By using the ModernGraham Valuation Model, I’ve selected five undervalued companies with a low beta reviewed by ModernGraham.  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 – August 2015!

Cigna Corporation (CI)

200px-Cigna_logo.svgCigna Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the high PEmg and PB ratios.  The Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.  As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $4.11 in 2011 to an estimated $6.94 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 6.79% 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 within a margin of safety relative to the price. (See the full valuation)

Keurig Green Mountain Inc. (GMCR)

220px-Keurig_greenmount_logoKeurig Green Mountain Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the short dividend history, and the high PEmg and PB ratios.  The Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.71 in 2011 to an estimated $3.17 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 6.72% 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 above the price. (See the full valuation)

The TJX Companies (TJX)

tjx_logo

TJX Companies performs well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the low current ratio as well as the high PEmg and PB ratios, 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 valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $1.29 in 2011 to $2.71 for 2015. This is a strong level of demonstrated growth, which is well above the market’s implied estimate of 8.67% annual earnings growth over the next 7-10 years. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. 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)

Starwood Property Trust Inc. (STWD)

starwood-property-trustStarwood Property Trust Inc. qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the short history as a publicly traded company, 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 $0.76 in 2011 to an estimated $1.98 for 2015.  This level of demonstrated growth is greater than the market’s implied estimate of 1.18% 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)

Pfizer Inc. (PFE)

500px-Pfizer_logo_(modern).svg

Pfizer performs well in the ModernGraham model and is suitable for Enterprising Investors. The Defensive Investor is concerned with the insufficient earnings growth over the last ten years, along with the poor PB ratio, while the Enterprising Investor has no initial concerns. As a result, all 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 valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $1.18 in 2011 to an estimated $2.03 for 2015. This is a strong level of growth and is well above the market’s implied estimate of only 4.25% annual earnings growth over the next 7-10 years.

Here, actual growth in EPSmg over the last several years has averaged nearly 14.4% annually, 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 still estimates a growth figure much higher than the market’s implied rate. 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)

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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