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Summary

  • WFC, COH, JPM, CA, and HCP are all rated as suitable for the Defensive Investor following the ModernGraham approach.
  • All five are found to be significantly undervalued according to the ModernGraham valuation model.
  • The market is implying a low growth rate, despite the demonstrated growth each company has achieved.

There are a number of great companies in the market today. By using the ModernGraham Valuation Model, I've selected five companies reviewed by ModernGraham with low PE mg ratios (price-to-earnings ratio, based on normalized earnings). Each company has been determined to be suitable for the Enterprising Investor, according to the ModernGraham approach, which is a modernized version of legendary value investor Benjamin Graham's requirements for Intelligent Investing.

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.

To see the full valuations of each of the following companies, please visit the ModernGraham Valuation Index.

1. Wells Fargo & Co. (NYSE:WFC)

Wells Fargo Corp is a company that is intriguing to all value investors as it passes all of the requirements of both the Defensive Investor and the Enterprising Investor. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company and comparing the company to other opportunities. As for the valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.83 in 2010 to an estimated $3.48 for 2014. This solid level of demonstrated growth more than supports the market's implied estimate of 2.79% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.

WFC Chart

WFC data by YCharts

2. Coach, Inc. (NYSE:COH)

Coach qualifies for either the Defensive Investor or the Enterprising Investor. The Defensive Investor's only concern with the company is the short dividend history while the company passes all of the requirements of the Enterprising Investor. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities. As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.03 in 2010 to an estimated $3.20 for 2014. This level of demonstrated growth outpaces the market's implied estimate of 1.22% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham's formula, to return an estimate of intrinsic value well above the price.

COH Chart

COH data by YCharts

3. JP Morgan Chase & Co. (NYSE:JPM)

JP Morgan Chase is suitable for either Defensive Investors or Enterprising Investors. The company passes all of the requirements of both investor types, which is a rare accomplishment. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company. From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.92 in 2010 to an estimated $4.75 for 2014. This strong level of demonstrated growth outpaces the market's implied estimate of only 1.49% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price at this time.

JPM Chart

JPM data by YCharts

4. CA, Inc. (NASDAQ:CA)

CA Inc. qualifies for Defensive Investors and thus also qualifies for Enterprising Investors. The Defensive Investor's only concern is the low current ratio, and even though the Enterprising Investor has concerns with the level of debt relative to the current assets, the Enterprising Investor is satisfied because the company is suitable for Defensive Investors. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company and its competitors by exploring the ModernGraham Valuation Index. From a valuation perspective, the company appears to be undervalued, after growing its EPSmg (normalized earnings) from $1.06 in 2010 to $1.91 for 2014. This demonstrated level of growth is greater than the market's implied estimate of 3.37% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is above the market price at this time.

CA Chart

CA data by YCharts

5. HCP, Inc. (NYSE:HCP)

HCP Inc. is a rare REIT which qualifies for the Defensive Investor and thus also the Enterprising Investor. The Defensive Investor's only concern at this time is the low current ratio and the Enterprising Investor is willing to overlook concerns regarding the level of debt relative to the current assets because the Defensive Investor is satisfied. As a result, value 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 undervalued after growing its EPSmg (normalized earnings) from $0.66 in 2010 to an estimated $2.12 for 2014. This level of demonstrated growth is greater than the market's implied estimate of 5.52% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham's formula, to return an estimate of intrinsic value above the market price.

HCP Chart

HCP data by YCharts

What do you think? Are these companies good opportunities for investors? Which companies would you put on this list?

Source: 5 Undervalued Companies For Defensive Investors