Seeking Alpha
Follows Benjamin Graham method, deep value, value, long only
Profile| Send Message|
( followers)

Summary

  • BEN, CVX, DOV, FMC, GPS, and JPM are all rated as undervalued by the ModernGraham valuation model.
  • All six qualify for the Enterprising Investor under the ModernGraham approach.
  • BEN, CVX, DOV, and JPM also qualify for the more conservative Defensive Investor.

ModernGraham currently covers over 390 companies in its Valuation Index, analyzing each in detail to determine whether they fit a modernized version of Benjamin Graham's conservative metrics from his classic The Intelligent Investor.

The site then proceeds to give each company a rating as suitable for Defensive Investors, those unwilling to conduct substantial research; Enterprising Investors, those happy to spend the time researching; or Speculators.

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. This article provides some good background behind the distinction and can help investors determine whether they are Defensive or Enterprising.

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 (price over normalized earnings) - 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.

Each company is further analyzed using one of Graham's valuation formulas to determine whether it is undervalued, fairly valued, or overvalued by Mr. Market today. The ModernGraham valuation model is based on Benjamin Graham's formula, Intrinsic Value = EPS x (8.5 x 2g), and is intended to give a good estimate of a company's value. ModernGraham uses a normalized EPS figure ("EPSmg") based on the last five years of earnings data, and a cumulative average growth rate based on the change in EPSmg over the last five years. This article on ModernGraham explains some of the background of the formula and performs a simple back-test.

The following six companies were found this week to be suitable for either Defensive Investors or Enterprising Investors (or both) and undervalued:

Chevron Corporation (NYSE:CVX)

Chevron Corporation qualifies for either the Defensive Investor or the Enterprising Investor. The Defensive Investor's only issue with the company is the low current ratio, while the Enterprising Investor is satisfied by default despite concerns with the level of debt relative to the current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with 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 $8.58 in 2010 to an estimated $11.50 for 2014. This level of demonstrated growth outpaces the market's implied estimate of 1.33% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham's formula, to return an estimate of intrinsic value above the price.

CVX Chart

CVX data by YCharts

Dover Corporation (NYSE:DOV)

Dover Corporation qualifies for either the Defensive Investor or the Enterprising Investor. The Defensive Investor's only concern is the high PB ratio, and the Enterprising Investor's only issue is 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 comfortable proceeding with 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 $3.14 in 2010 to an estimated $4.83 for 2014. This level of demonstrated growth outpaces the market's implied estimate of 4.94% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham's formula, to return an estimate of intrinsic value above the price.

DOV Chart

DOV data by YCharts

FMC Corporation (NYSE:FMC)

FMC Corporation is not suitable for the Defensive Investor but does satisfy the Enterprising Investor. The Defensive Investor has concerns with the low current ratio, lack of dividend payments and the high PB ratio, while the Enterprising Investor has no initial concerns. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with 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 $1.55 in 2010 to an estimated $3.38 for 2014. This level of demonstrated growth outpaces the market's implied estimate of 5.42% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham's formula, to return an estimate of intrinsic value above the price.

FMC Chart

FMC data by YCharts

Franklin Resources Inc. (NYSE:BEN)

Franklin Resources qualifies for either the Defensive Investor or the Enterprising Investor. The Defensive Investor's only issue with the company is the high PB ratio, while the Enterprising Investor has no initial concerns. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with 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 $1.91 in 2010 to an estimated $3.27 for 2014. This level of demonstrated growth outpaces the market's implied estimate of 4.27% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham's formula, to return an estimate of intrinsic value above the price.

BEN Chart

BEN data by YCharts

The Gap Inc. (NYSE:GPS)

The Gap Inc. is not suitable for the Defensive Investor but does qualify for the Enterprising Investor. The Defensive Investor has concerns with the low current ratio and the high PB ratio, while the Enterprising Investor has no initial concerns. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with 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 $1.52 in 2011 to an estimated $2.50 for 2015. This level of demonstrated growth outpaces the market's implied estimate of 5.00% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham's formula, to return an estimate of intrinsic value above the price.

GPS Chart

GPS data by YCharts

JPMorgan Chase (NYSE:JPM)

JPMorgan Chase is suitable for either the Defensive Investor or the Enterprising Investor, as the company passes all of the requirements of either investor type. 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 undervalued after growing its EPSmg (normalized earnings) from $2.92 in 2010 to an estimated $4.82 for 2014. This level of demonstrated growth outpaces the market's implied estimate of 1.82% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham's formula, to return an estimate of intrinsic value above the market price.

JPM Chart

JPM data by YCharts

Source: 6 Elite Companies To Research This Week