The market is filled with hyped-up companies that are touted as great investments, but Benjamin Graham taught that intelligent investors must look past the hype and avoid speculating about a company's future. As a result, the ModernGraham valuation model selected five of the most overvalued companies.
Each company has been determined to not be suitable for either the Defensive Investor or the Enterprising Investor according to the ModernGraham approach. 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.
The Kraft Heinz Co. (KHC, Financial)
Kraft Heinz does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability over the last 10 years, the poor dividend history and the high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets and the lack of earnings stability or growth over the last five years. As a result, all value investors should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $2.91 in 2012 to an estimated $2.12 for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 16.77% annual earnings growth over the next seven to 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 Kraft Heinz revealed the company was trading above its Graham Number of $58.75. The company pays a dividend of $2.9 per share for a yield of 3.3%, putting it among the best dividend-paying stocks today. Its PEmg (price over earnings per share) was 42.03, above the industry average of 24.74. Finally, the company was trading above its net current asset value (NCAV) of $-44.38. (See the full valuation)
Semtech Corp. (SMTC, Financial)
Semtech does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last 10 years, the poor dividend history and the high PEmg and price-book (P/B) ratios. The Enterprising Investor has concerns regarding the lack of earnings stability or growth over the last five years and the lack of dividends. As a result, all value investors should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for valuation, the company appears to be overvalued after seeing its EPSmg decline from 83 cents in 2013 to an estimated 20 cents for 2017. This level of demonstrated earnings growth does not support the market's implied estimate of 81.3% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Semtech revealed the company was trading above its Graham Number of $14.59. The company does not pay a dividend. Its PEmg was 171.1, above the industry average of 28.12. Finally, the company was trading above its NCAV of 36 cents. (See the full valuation)
Teradata Corp. (TDC, Financial)
Teradata does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last 10 years, the poor dividend history and the high PEmg and P/B ratios. The Enterprising Investor has concerns regarding the lack of earnings stability or growth over the last five years and the lack of dividends. As a result, all value investors should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for valuation, the company appears to be overvalued after seeing its EPSmg decline from $2 in 2012 to an estimated 88 cents for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 12.18% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Teradata revealed the company was trading above its Graham Number of $13.15. The company does not pay a dividend. Its PEmg was 32.86, below the industry average of 38.13, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its NCAV of $1.03. (See the full valuation)
Silicon Laboratories Inc. (SLAB, Financial)
Silicon Laboratories does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings growth over the last 10 years, the poor dividend history and the high PEmg and P/B ratios. The Enterprising Investor has concerns regarding the lack of earnings growth over the last five years and the lack of dividends. As a result, all value investors should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for valuation, the company appears to be overvalued after seeing its EPSmg decline from $1.27 in 2012 to an estimated $1.15 for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 25.39% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Silicon Laboratories revealed the company was trading above its Graham Number of $26.34. The company does not pay a dividend. Its PEmg was 59.28, above the industry average of 28.12. Finally, the company was trading above its NCAV of $5.34. (See the full valuation)
Staples Inc. (SPLS, Financial)
Staples does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last 10 years and the high PEmg ratio. The Enterprising Investor has concerns regarding the lack of earnings stability or growth over the last five years. As a result, all value investors should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for valuation, the company appears to be overvalued after seeing its EPSmg decline from 72 cents in 2013 to an estimated 10 cents for 2017. This level of demonstrated earnings growth does not support the market's implied estimate of 40.3% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Staples revealed the company was trading above its Graham Number of $0. The company pays a dividend of 48 cents per share for a yield of 5.4%, putting it among the best dividend-paying stocks today. Its PEmg was 89.11, which was above the industry average of 50.09. Finally, the company was trading above its NCAV of 91 cents. (See the full valuation)
What do you think? Are these companies a bad opportunity for Intelligent Investors? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclosure:Â The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. 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. This article first appeared on ModernGraham.
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