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Summary

  • EMN, BBBY, JPM, HCP and CVX are all rated as suitable for both the Defensive Investor and the Enterprising Investor following the ModernGraham approach.
  • All five are found to be significantly undervalued according to the ModernGraham valuation model.
  • Each company is trading within 15% of its 52-Week Low.

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 found to be undervalued by the site and which are trading relatively close to a 52-Week Low. Each company has been determined to be suitable for the Defensive 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 be considered by the Defensive Investor, a company must pass at least 6 of the following 7 tests.

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion
  2. Sufficiently Strong Financial Condition - current ratio greater than 2
  3. Earnings Stability - positive earnings per share for at least 10 straight years
  4. Dividend Record - has paid a dividend for at least 10 straight years
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period
  6. Moderate PEmg ratio - PEmg is less than 20
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50

Note: If the company is a financial or insurance company, test #2 regarding the financial condition is not required; however, the company must pass all six of the remaining tests.

To be considered by the Enterprising Investor, a company must pass at least 4 of the following 5 tests or be suitable for the Defensive Investor.

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1
  3. Earnings Stability - positive earnings per share for at least 5 years
  4. Dividend Record - currently pays a dividend
  5. Earnings growth - EPSmg greater than 5 years ago

Note: If the company is a financial or insurance company, tests #1 and #2 regarding the financial condition are not required; however, the company must pass all three of the remaining tests.

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

1. Eastman Chemical Company (NYSE:EMN)

Eastman Chemical Co. is suitable for both Defensive Investors and Enterprising Investors. The Defensive Investor's only concern is with the high PB ratio, while the Enterprising Investor's concern lies with the high level of debt relative to the net current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel very 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 $2.06 in 2010 to an estimated $5.64 for 2014. This strong level of demonstrated growth surpasses the market's implied estimate of 3.36% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.

EMN Chart

EMN data by YCharts

2. Bed Bath & Beyond Inc. (NASDAQ:BBBY)

Bed Bath & Beyond qualifies for either the Defensive Investor or the Enterprising Investor. The only issue for either investor type is the lack of dividend payments. 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. From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.38 in 2011 to an estimated $4.55 for 2014. This level of demonstrated growth outpaces the market's implied estimate of 2.52% 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.

BBBY Chart

BBBY data by YCharts

3. JPMorgan Chase Inc. (NYSE:JPM)

JPMorgan 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 and comparing the company to other opportunities. 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. HCP, Inc. (NYSE:HCP)

HCP Inc. is a rare REIT that 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

5. Chevron Corporation (NYSE:CVX)

Chevron Corporation qualifies for both Defensive Investors and Enterprising Investors. The Defensive Investor is only concerned with the low current ratio, and the company by default also qualifies for 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 its competitors. From a valuation side of things, the company appears undervalued after growing its EPSmg (normalized earnings) from $8.58 in 2010 to an estimated $11.17 in 2014. This level of demonstrated growth outpaces the market's implied estimate of 1.27% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the price.

CVX Chart

CVX data by YCharts

Source: 5 Undervalued Companies For Defensive Investors Close To 52-Week Lows