Seeking Alpha

5 Best Valued Stocks In The Dow - April 2018

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Includes: CSCO, JPM, NKE, V, VZ
by: Benjamin Clark
Summary

These companies are all rated as suitable for the defensive investor and/or the enterprising investor following the ModernGraham approach.

They are found to be the closest to undervalued according to the ModernGraham valuation model.

The companies are the best ModernGraham rated companies of all of the Dow Jones Industrial Average.

By using the ModernGraham Valuation Model, I've selected the five best valued Dow components reviewed by ModernGraham which are suitable for the Defensive Investor and/or the Enterprising Investor according to the ModernGraham approach. Normally, I would have selected the five which are rated as undervalued by the Graham Formula (which is different from the Graham Number), I found that only one company meets both the criteria for the defensive and/or enterprising investor and is undervalued.

As a result, I've tweaked this screen slightly to include the companies trading closest to their estimated intrinsic value. After all, the market as a whole may be overvalued, but the intelligent investor still must seek out opportunities that limit downside risk.

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.

Here are the 5 companies, listed in order from most undervalued.

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 the valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) 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.

Source: Compiled by author from SEC filings and price data

JPMorgan Chase & Co. (JPM)

JPMorgan Chase & Co. 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 the valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $4.82 in 2014 to an estimated $6.65 for 2018. This level of demonstrated earnings growth supports the market's implied estimate of 4.57% 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 within a margin of safety relative to the price.

At the time of valuation, further research into JPMorgan Chase & Co. revealed the company was trading above its Graham Number of $107.91. The company pays a dividend of $2.12 per share, for a yield of 1.8%. Its PEmg (price over earnings per share - ModernGraham) was 17.65, which was below the industry average of 20.84, which by some methods of valuation makes it one of the most undervalued stocks in its industry.

Source: Compiled by author from SEC filings and price data

Cisco Systems, Inc. (CSCO)

Cisco Systems, 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 PEmg and PB ratios. 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 the valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.54 in 2014 to an estimated $2.1 for 2018. This level of demonstrated earnings growth supports the market's implied estimate of 6.2% 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 within a margin of safety relative to the price.

At the time of valuation, further research into Cisco Systems, Inc. revealed the company was trading above its Graham Number of $27.49. The company pays a dividend of $1.1 per share, for a yield of 2.5%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share - ModernGraham) was 20.91, which was below the industry average of 38.79, 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 of $1.32.

Source: Compiled by author from SEC filings and price data

Visa Inc. (V)

Visa Inc. is suitable for the enterprising investor but not the more conservative defensive investor. The defensive investor is concerned with the high PEmg and PB ratios. 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 the valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.62 in 2014 to an estimated $3.09 for 2018. This level of demonstrated earnings growth does not support the market's implied estimate of 15.93% 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 below the price.

At the time of valuation, further research into Visa Inc. revealed the company was trading above its Graham Number of $32.63. The company pays a dividend of $0.66 per share, for a yield of 0.5%. Its PEmg (price over earnings per share - ModernGraham) was 40.36, which was above the industry average of 21.55. Finally, the company was trading above its net current asset value of $-7.

Source: Compiled by author from SEC filings and price data

Nike Inc. (NKE)

Nike Inc. is suitable for the enterprising investor but not the more conservative defensive investor. The defensive investor is concerned with the high PEmg and PB ratios. 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 the valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.3 in 2014 to an estimated $2.15 for 2018. This level of demonstrated earnings growth does not support the market's implied estimate of 11.57% 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 below the price.

At the time of valuation, further research into Nike Inc. revealed the company was trading above its Graham Number of $18.98. The company pays a dividend of $0.7 per share, for a yield of 1%. Its PEmg (price over earnings per share - ModernGraham) was 31.64, which was below the industry average of 32.02, 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 of $2.58.

Source: Compiled by author from SEC filings and price data

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.

Additional disclosure: 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.