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There are a number of great companies in the market today. By using the ModernGraham Valuation Model, I've selected five undervalued companies reviewed by ModernGraham that are components of the Dow Jones Industrial Average. Each company has been determined to be suitable for 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.

Investors should keep in mind the 7 Key Tips to Value Investing while proceeding with further research of all of the following companies:

  • Caterpillar Inc. (NYSE:CAT) - Caterpillar is a very strong company based on its financials, and may be suitable for the defensive investor (and hence an enterprising investor as well). A prudent and intelligent investor should do more research, but it also appears that Caterpillar may be undervalued based on the amount of growth seen in its earnings per share over the last several years. Specifically, the company has grown EPSmg (normalized earnings) from $5.08 in 2008 to an estimated $6.25 for 2013. This growth outpaces the market's implied growth rate of 2.48%.
  • E I Du Pont De Nemours And Co (NYSE:DD) - Du Pont is a strong company that may be suitable for an enterprising investor but not a defensive investor. The company's current ratio is too low and the price to book ratio is too high for comfort for the defensive investor. Since the Enterprising Investor does not require a current ratio as high as the Defensive Investor, the company does pass the requirements of that investor type. The ModernGraham valuation model does view the company favorably, and it appears to be undervalued. This is a company that is absolutely worth further research by an enterprising investor.
  • Travelers Companies (NYSE:TRV) - Travelers passes all of the requirements for Defensive Investors. In addition, the company passes all of the requirements of the Enterprising Investor. From a valuation standpoint, Travelers appears to be fairly valued. Earnings growth has been uneven, but is definitely present, having grown EPSmg from $5.11 in 2008 to an estimated $6.62 in 2013. This growth is healthy and leads to a value that is within the margin of safety of where the company is trading today. As a result, Defensive Investors and Enterprising Investors should feel comfortable moving forward with determining whether Travelers is the right fit for the individual investor at this time.
  • UnitedHealth Group Inc. (NYSE:UNH) - UnitedHealth is a very attractive company based on both its financials and its valuation. The company passes most of the tests of the Defensive Investor and the Enterprising Investor, with its only downside the poor current ratio. The company has a strong dividend history and stable earnings history. From a valuation standpoint, the company's growth in EPSmg from $2.77 in 2008 to an estimated $4.93 for 2013 is impressive. As a result of this strong history of growth, the ModernGraham valuation model looks favorably upon UnitedHealth and the company appears to be undervalued. Investors should pay close attention to UnitedHealth and continue with further evaluation of the company when considering making an investment.
  • Verizon Communications (NYSE:VZ) - Verizon Communications appears to be a solid opportunity worthy of further research by both Defensive Investors and Enterprising Investors. The only significant concern is that the EPS for 2013 is estimated to be down significantly from the last few years. However, it does not drag the EPSmg down enough to negatively affect the result. The company passes all of the requirements for the Defensive Investor, proving it has strong financials, and it also passes all of the requirements for the Enterprising Investor. As a result, value investors seeking to follow Benjamin Graham's methods should pay close attention to the company and do further research to determine if it is suitable for their individual portfolios. From a valuation standpoint, the company fares well in the ModernGraham valuation model after having grown its EPSmg from $2.16 in 2008 to an estimated $3.22 in 2013. Since this level of proven historical growth outpaces the growth implied by the market, it is possible Verizon is undervalued.
Source: 5 Outstanding Dow Components