There are a number of great companies in the market today. The ModernGraham valuation model selected the five most undervalued Dow Components. These stocks are suitable for 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.
Travelers Companies Inc. (TRV, Financial)
Travelers 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 should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $5.48 in 2012 to an estimated $9.87 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.49% annual earnings growth over the next seven to 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 Travelers revealed the company was trading below its Graham Number of $134.38. The company pays a dividend of $1.95 per share for a yield of 1.7%. Its PEmg (price over earnings per share) was 11.48, below the industry average of 16.56, which by some methods of valuation makes it one of the most undervalued stocks in its industry. (See the full valuation)
United Technologies Corp. (UTX, Financial)
United Technologies 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 should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg from $5.17 in 2012 to an estimated $7.65 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 2.29% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price. (See the full valuation)
American Express Co. (AXP, Financial)
American Express 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 should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg from $3.43 in 2012 to an estimated $5.09 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.95% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price. (See the full valuation)
Boeing is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio and high pricee-book (P/B) ratio. The Enterprising Investor is only concerned with the low current ratio. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be fairly valued after growing its EPSmg from $4.51 in 2012 to an estimated $7.35 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 8.26% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value within a margin of safety relative to the price. (See the full valuation)
Cisco Systems Inc. (CSCO, Financial)
Cisco Systems qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the poor dividend history. The Enterprising Investor has no initial concerns. As a result, all value investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be fairly valued after growing its EPSmg from $1.5 in 2013 to an estimated $2 for 2017. This level of demonstrated earnings growth supports the market's implied estimate of 3.34% annual earnings growth over the next seven to 10 years. As a result, the valuation model 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 revealed the company was trading above its Graham Number of $25.55. The company pays a dividend of 99 cents per share for a yield of 3.3%, putting it among the best dividend-paying stocks today. Its PEmg was 15.17, below the industry average of 38.63, 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 $4. (See the full valuation)
What do you think? Are these companies a good value for Defensive 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 read our full disclaimer. This article first appeared on ModernGraham.
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