5 Undervalued Companies In The S&P 500

Summary

• These companies are all rated as suitable for the Defensive Investor and/or the Enterprising Investor following the ModernGraham approach.
• All ten are found to be significantly undervalued according to the ModernGraham valuation model.
• The companies are among the most undervalued of all of the S&P 500.

There are a number of great companies in the market today. By using the ModernGraham Valuation Model, I've selected the some of the most undervalued companies of the S&P 500. The ModernGraham model is based on the full teachings of Benjamin Graham. All of these companies are suitable for the Defensive Investor and/or the Enterprising Investor.

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.

Verizon Communications Inc. (VZ)

Verizon Communications Inc. qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings defined in more detail here) from $2.11 in 2014 to an estimated $4.58 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.11% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Verizon Communications Inc. revealed the company was trading above its Graham Number of $29.66. The company pays a dividend of $2.34 per share, for a yield of 4.8%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share - ModernGraham) was 10.71, which was below the industry average of 37.96, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-45.

Principal Financial Group Inc. (PFG)

Principal Financial Group Inc. qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company's strong financial position. The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.9 in 2014 to an estimated $5.62 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.21% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham's formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Principal Financial Group Inc. revealed the company was trading below its Graham Number of $74.18. The company pays a dividend of $1.87 per share, for a yield of 3%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share - ModernGraham) was 10.92, which was below the industry average of 20.16, which by some methods of valuation makes it one of the most undervalued stocks in its industry.

Gilead Sciences, Inc. (GILD)

Gilead Sciences, Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the poor dividend history, and the high PB ratio. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.61 in 2014 to an estimated $7.05 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.33% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Gilead Sciences, Inc. revealed the company was trading above its Graham Number of $46.47. The company pays a dividend of $2.08 per share, for a yield of 2.6%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share - ModernGraham) was 11.16, which was below the industry average of 28.67, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-13.66.

Lincoln National Corporation (LNC)

Lincoln National Corporation is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $4.25 in 2014 to an estimated $7.21 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.03% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham's formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Lincoln National Corporation revealed the company was trading below its Graham Number of $121.79. The company pays a dividend of $0.87 per share, for a yield of 1.1% Its PEmg (price over earnings per share - ModernGraham) was 10.56, which was below the industry average of 20.16, which by some methods of valuation makes it one of the most undervalued stocks in its industry.

LyondellBasell Industries NV (LYB)

LyondellBasell Industries NV is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years, and the poor dividend history, and the high PB ratio. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $6.13 in 2014 to an estimated $9.75 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.3% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into LyondellBasell Industries NV revealed the company was trading above its Graham Number of $66.06. The company pays a dividend of $3.55 per share, for a yield of 3.3%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share - ModernGraham) was 11.1, which was below the industry average of 30.04, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-13.94.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

See a list of my current holdings on ModernGraham.com. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer on ModernGraham.com.

Comments

[User 13615912]

Lincoln has been gradually but steadily declining of late. Any theories as to what gives?

[hsheikh]

I had viewed lincoln as very undervalued relative to its share performance over its history and its PE. Why do you think it has such a low PE ratio? Just a boring industry?

[Big Froggie]

Long Gilead

[Uain53]

Actually LYB was taken out of bankruptcy around 2010 and has paid and increased it's dividend since 2011. I believe it made it to David Fish's Drip.org CCC list for >5 yrs of increasing dividends. I have owned it since 2012 and very pleased with the performance to date.

[Gold Finder]

But also lyb is overvalued and not the typical buyandhold stock.

I rode it from 70 till 100 dollars. I left because the high valuation breaks the power of the buybacks.

[Uain53]

Ah yes, Mr. Gold, but they do keep rising the dividend. That's wot keeps me loiterin' about.

[mellonhead]

Yes, GILD is finally gaining some traction after purchase of Kite pharma.

[jade mid]

It’s about time an author on here mentioned this jewel of a stock named Gild as an undervalued company. Four and a half years of underperforming and declining revenues with piss poor management. Glad it is FINALLY getting some undervalued articles on here.

[GDPPP]

Benjamin Clark, If you really want to know the most undervalued company in S&P500, it's Micron - $MU. Investors are still pricing in the stock for cyclicality and as a commodity business, but with potential tailwinds in Cloud, autonomous, AI, mobile, storage, PC, IOT markets, along with innovation in new products, the growth story in MU is still in it's early stages.

[Benjamin Clark]

MU's high debt level relative to its net current assets, lack of dividend, and unstable earnings over the last 5 years all scare me away. It doesn't meet my requirements for the Defensive Investor or the Enterprising Investor.

[GDPPP]

You are clearly looking at it backwards. Management has shown a commitment to reduce down that debt with ever increasing cash flows. IMO, It's a clear turnaround story under Sanjay Mehrotra.

[Uain53]

DRAMs and NAND are still a commodity, like Wheat or Hog Bellies. Some years you make a bundle and other years you just try to survive. Also the cost to invest in new technologies and the time for depreciation are killers.
Worked in the industry for 40+ yrs, had more fun than one should be allowed while getting paid for it. But I don't invest in technology now.... too easy to think I know it all and get burnt.

[Gold Finder]

LYB is not cheap, overcapacity is always a risk in this sector and low oil prices are temporary boosts for this company.

A perfect example for a shiller p/e ratio.

[janedoeseeker]

Not to mention: foreign taxes.

[Gold Finder]

I owned them at 70 dollars and sold at 100 dollars. I never paid taxes since the dividends are british. While HQ is dutch. A bit weird.

[mlumnitz]

Low oil prices are not boosting LYB. LYB primarily cracks North American NGL feedstocks although they do own a few liquid crackers in Europe. NGL crackers will gain even more advantage when oil rises forcing the cost of naphtha/oil based feeds higher. I agree that overcapacity is a concern in the next 5-10 yrs.