5 Undervalued Companies with a Low Beta – October 2015

There 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. 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!

Dollar Tree, Inc. (DLTR)

Dollar Tree Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the lack of dividends, along with the high PEmg and PB ratios. The Enterprising Investor is only initially concerned by the lack of dividends. 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 $1.48 in 2012 to an estimated $2.84 for 2016. This level of demonstrated earnings growth supports the market’s implied estimate of 9.7% 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)

Motorola Solutions Inc (MSI)

Motorola Solutions is not suitable for Defensive Investors but it does pass the initial requirements of the Enterprising Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years, the inconsistent dividend history, and the high 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 that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from a loss of $0.15 in 2011 to an estimated gain of $3.73 for 2015. This is a robust level of demonstrated growth and outpaces the market’s implied estimate for annual earnings growth of 3.65% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged significantly higher than the market’s estimate, 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 Motorola Solutions is significantly undervalued at the present time. (See the full valuation)

The TJX Companies (TJX)

TJX Companies is not suitable for Defensive Investors but it does pass the initial requirements of the Enterprising Investor. The Defensive Investor is concerned with the low current ratio along with the high PEmg and PB ratios, 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 that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $1.56 in 2012 to an estimated $2.98 for 2016. This is a robust level of demonstrated growth and outpaces the market’s implied estimate for annual earnings growth of 7.3% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged around 18.3% 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 TJX Companies is significantly undervalued at the present time. (See the full valuation)

Cigna Corporation (CI)

Cigna 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 while 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 next stage of the analysis.

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 $6.92 for 2015. This level of demonstrated earnings growth supports the market’s implied estimate of 5.82% 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)

Amgen, Inc. (AMGN)

Amgen Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the short dividend history and 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 further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $4.23 in 2011 to an estimated $7.04 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 6.11% 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)

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 that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.