Defensive Investor
Defensive Investor

There are a number of great companies in the market today. By using the ModernGraham Valuation Model, I’ve selected the five most undervalued companies reviewed by ModernGraham. Each company has been determined to be suitable for Defensive 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.  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.

Be sure to check out the history of this screen to find out which companies have been selected in the past!

Twenty-First Century Fox (FOXA)

220px-21st_Century_Fox_logo.svgTwenty-First Century Fox Inc. is suitable for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor is only concerned by the lack of earnings stability over the last ten years, while the Enterprising Investor’s only concern is the level of debt relative to the net current assets.  As a result, all value 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.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.66 in 2011 to an estimated $2.62 for 2015.  This level of demonstrated growth is greater than the market’s implied estimate of 2.33% 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)

CF Industries Holdings (CF)

Cfindustrieslogo

CF Industries passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only concerned by the low current ratio, while the Enterprising Investor’s only concern is the level of debt relative to the net current assets. 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, it has grown its EPSmg (normalized earnings) from $2.46 in 2011 to an estimated $4.82 for 2015. This is a fairly strong level of demonstrated growth, and outpaces the market’s implied estimate for annual earnings growth of only 2.33% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged around 19.25% annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that CF Industries is significantly undervalued at the present time. (See the full valuation)

Yahoo! Inc. (YHOO)

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Yahoo! passes the initial requirements of the Enterprising Investor, but not the more conservative Defensive Investor. The Defensive Investor is concerned by the company’s lack of dividend payments, a concern shared by the Enterprising Investor. 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, it has grown its EPSmg (normalized earnings) from $0.67 in 2011 to an estimated $2.90 for 2015. This is a very strong level of demonstrated growth, which is well above the market’s implied estimate for annual earnings growth of 3.47% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has been astronomical, averaging nearly 67% annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that the company is undervalued at the present time. (See the full valuation)

Eastman Chemical Company (EMN)

200px-Eastman_Chemical_Company_logo.svg

Eastman Chemical performs well in the ModernGraham model and is suitable for both Defensive Investors and Enterprising Investors. The Defensive Investor is concerned with the low current ratio, while the Enterprising Investor is similarly concerned with the level of debt relative to the net current assets. 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 valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $2.88 in 2011 to an estimated $5.86 for 2015. This is a strong level of growth and is well above the market’s implied estimate of only 2.39% annual earnings growth over the next 7-10 years.

Here, actual growth in EPSmg over the last several years has averaged nearly 21% 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)

Fossil Group Inc. (FOSL)

220px-Fossil_logo.svgFossil Group performs well in the ModernGraham model and is suitable for both Defensive and Enterprising Investors. Both investor types are only initially concerned by the lack of dividend payments. 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 valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $1.68 in 2011 to an estimated $6.01 for 2015. This is a strong level of growth and is well above the market’s implied estimate of only 1.68% annual earnings growth over the next 7-10 years.

Defensive Investor
Defensive Investor

Here, actual growth in EPSmg over the last several years has averaged nearly 16% 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)

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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