There are a number of great companies in the market today. By using the ModernGraham Valuation Model, I've selected five of the most undervalued companies reviewed by ModernGraham. Each company has been determined to be suitable for Enterprising Investor but not the Defensive Investor according to the ModernGraham approach. Defensive Investors are defined as investors that 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 may also wish to review some other companies that satisfy the ModernGraham requirements while proceeding with further research of all of the following companies:
- Apple, Inc. (NASDAQ:AAPL) - Apple Inc.'s earnings are just unbelievable, and the EPSmg (normalized earnings) have grown from $3.52 in 2008 to $33.18 in 2013. That is astronomical growth, nearly doubling on average every year during the period. However, the company does not satisfy the Defensive Investor by having a current ratio that is too low, a PB ratio that is too high, and a dividend history that is too short. But from the eyes of the Enterprising Investor, this is a very attractive company, passing all of the Enterprising Investor's requirements. From a valuation perspective, the growth Apple has achieved is so high that the ModernGraham valuation model was forced to use its built in cap on a growth estimate. After all, it would be foolish to assume that Apple will continue to grow at the pace it has over the last 10 years; but given the historical pace in earnings, it also seems that the market's implied rate of 3.96% is significantly low and the company would appear to be undervalued. As a result, Enterprising Investors should feel very comfortable in proceeding with further research into whether the company would be appropriate for their individual portfolios.
- Coach, Inc. (NYSE:COH) - Coach Inc. is a very strong company, with healthy financials and a very consistent and promising level of growth in earnings. The company is not suitable for the Defensive Investor, having failed the PB ratio requirement and the Dividend Record requirement. The company passes all of the requirements of the Enterprising Investor, and that investor type should feel comfortable proceeding with further research. From a valuation standpoint, the company has grown its EPSmg (normalized earnings) from $1.79 in 2009 to an estimated $3.33 for 2014. The market implies a growth rate of 4.06%, a rate which is easily supported by the earnings history. As a result, the company appears to be undervalued at the current time and there may be an opportunity for profit.
- EMC Corporation (NYSE:EMC) - EMC Corporation is a very attractive company at the moment. The company does not qualify for the Defensive Investor, due to a current ratio that isn't quite high enough, lack of a strong dividend history, and a high PEmg ratio. However, the company does qualify for the Enterprising Investor after passing all five requirements for the investor type. As a result, Enterprising Investors should proceed with further research. From a valuation perspective, the company has grown EPSmg (normalized earnings) from $0.61 in 2008 to an estimated $1.15 for 2013. This is a solid level of growth that has been very consistent and is greater than the market's current implied estimate for growth of 6.85%. Therefore, it would appear that EMC Corporation is undervalued.
- Motorola Solutions Inc. (NYSE:MSI) - Motorola Solutions Inc. presents an interesting scenario. The company is far from suitable for the Defensive Investor type, defined as investors that seek to have the least possible amount of risk, but is suitable for the Enterprising Investor despite failing the earnings stability requirement. Enterprising Investors should feel comfortable proceeding with further research into whether Motorola would be suitable in their individual portfolios. From a valuation side of things, the company has grown its EPSmg (normalized earnings) from -$1.61 in 2009 to an estimated $2.72 for 2013. That's quite a turnaround, and more than supports the market's implied estimate of 7.95% growth. As a result, the company would appear to be undervalued at the current time.
- Oracle Corp. (NYSE:ORCL) - Oracle Corporation is a company that has displayed strong and consistent earnings growth, and passes the majority of the requirements of both the Defensive Investor and the Enterprising Investor. The company does not qualify for the Defensive Investor, however, because it is currently trading at a high PB ratio and it has not paid a dividend long enough. The Enterprising Investor is not as picky and Oracle passes all five of the investor type's requirements. As a result, Enterprising Investors should feel comfortable proceeding with further research into whether Oracle would be suitable for their individual portfolios. From a valuation perspective, the company's strong growth of EPSmg from $0.93 in 2009 to an estimated $2.15 for 2014 results in a very favorable result through the ModernGraham valuation model. The market is currently implying a growth estimate of 4.48%, but Oracle has easily grown faster than that over the historical period we've reviewed, and would therefore appear to be undervalued at this time.