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Are you a value investor looking to reduce risk in large-caps with troubling fundamentals? If so, we researched companies that appear undervalued, but bear the risk of at least 1 accounting signal, namely, inventory trends.

We started with a group of over 500 large-cap companies.

We screened that universe for those that appear undervalued relative to the Graham Number. The Graham Number is a measure of maximum fair value created by the "godfather of value investing" Benjamin Graham.

It is based on a stock's EPS and book value per share (BVPS).

Graham Number = SQRT(22.5 x TTM EPS x MRQ BVPS)

The equation assumes that P/E should not be higher than 15 and P/BV should not be higher than 1.5. Stocks trading well below their Graham Number may be undervalued.

We then moved to looking at slower growth in quarterly revenue than growth in quarterly inventory year-over-year. We also looked for companies with quarterly inventory increasing as a percent of current assets.

When revenue is growing slower than inventory, it may indicate that the company is having trouble selling its inventory - although this might just indicate inventory building or a change in sales policies.

Our final list consisted of 3 stocks.

A Closer Look

We took a closer look at Bunge Limited (NYSE:BG). The company's stock trades around $73.55 versus its 52-week range of $73.36-$75.19, up 18% in the past 1-year. The stock yields 1.47%, and the ex-dividend date is scheduled for February 13th, 2013.

The company recently reported a fourth quarter loss, which led to a 7% downside in the stock. Chief Executive Alberto Weisser, 57 years old has retired, and will be replaced by Soren Schroder, who heads the North American unit.

The company's fourth quarter earnings per share fell 66% to $0.57, below the consensus of $2.36. Revenues were reported as $17.04 billion versus the consensus of $18.81 billion. The big loss at the company's risk management business was responsible for the disappointing earnings. Do you think this is a one-time occurrence?

The List

For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.

Do you own any of these stocks? Is it time to reduce risk in these names? Use this list as a starting point for your own analysis.

1. Apache Corp. (NYSE:APA): Operates as an independent energy company.

  • Market cap at $33.22B, most recent closing price at $84.91.
  • Diluted TTM earnings per share at 6.28, and a MRQ book value per share value at 75.36, implies a Graham Number fair value of $103.19. Based on the stock's price at $85.36, this implies a potential upside of 20.89% from current levels.
  • Revenue grew by -3.44% during the most recent quarter ($4,179M vs. $4,328M y/y). Inventory grew by 36.75% during the same time period ($774M vs. $566M y/y). Inventory, as a percentage of current assets, increased from 12.37% to 15.34% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).

2. Bunge Limited : Engages in the agriculture and food businesses worldwide.

  • Market cap at $11.6B, most recent closing price at $79.38.
  • Diluted TTM earnings per share at 5.94, and a MRQ book value per share value at 74.68, implies a Graham Number fair value of $99.90. Based on the stock's price at $79.86, this implies a potential upside of 25.1% from current levels.
  • Revenue grew by 10.74% during the most recent quarter ($17,293M vs. $15,616M y/y). Inventory grew by 29.9% during the same time period ($8,115M vs. $6,247M y/y). Inventory, as a percentage of current assets, increased from 41.17% to 44.97% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).

3. Chevron Corporation (NYSE:CVX): Engages in petroleum, chemicals, mining, power generation, and energy operations worldwide.

  • Market cap at $226.86B, most recent closing price at $115.91.
  • Diluted TTM earnings per share at 12.19, and a MRQ book value per share value at 67.93, implies a Graham Number fair value of $136.50. Based on the stock's price at $116.5, this implies a potential upside of 17.17% from current levels.
  • Revenue grew by -9.91% during the most recent quarter ($58,044M vs. $64,432M y/y). Inventory grew by 31.67% during the same time period ($7,995M vs. $6,072M y/y). Inventory, as a percentage of current assets, increased from 11.45% to 13.67% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).

*EPS and BVPS data sourced from Yahoo! Finance, all other data sourced from Finviz.

Source: 3 Undervalued Large-Caps With Troubling Inventory Trends