There are a number of great companies in the market today. Using the ModernGraham Valuation Model, I have selected five undervalued companies with a low beta.
A company's beta indicates the correlation at which its price moves in relation to the market. A beta less than one indicates a company is less volatile than the market.
Each company has been determined to 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.
With a low beta, Mr. Market may not hit these companies as harshly in a downturn, so be sure to check them out in depth.
LGI Homes Inc. (LGIH, Financial)
LGI Homes is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, insufficient earnings stability over the last 10 years and the poor dividend history. The Enterprising Investor is only concerned with the lack of dividends. 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 39 cents in 2013 to an estimated $2.76 for 2017. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.6% 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 above the price.
At the time of valuation, further research into LGI Homes revealed the company was trading below its Graham Number of $36.13. The company does not pay a dividend. Its PEmg (price over earnings per share - ModernGraham) was 11.7, below the industry average of 28.49, 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 $15.24. (See the full valuation)
Kors Holdings Ltd. (KORS, Financial)
Kors Holdings 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 10 years, the poor dividend history and the high price-book (P/B) ratio. The Enterprising Investor is only concerned with the lack of dividends. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be undervalued after growing its EPSmg from 96 cents in 2013 to an estimated $4.07 for 2017. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.92% 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)
Super Micro Computer Inc. (SMCI, Financial)
Super Micro Computer is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the small size and poor dividend history. The Enterprising Investor is only concerned with the lack of dividends. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be undervalued after growing its EPSmg from 64 cents in 2013 to an estimated $1.42 for 2017. This level of demonstrated earnings growth outpaces the market's implied estimate of 5.17% 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.
At the time of valuation, further research into Super Micro Computer revealed the company was trading above its Graham Number of $21.83. The company does not pay a dividend. Its PEmg was 18.85, 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 $10.02. (See the full valuation)
Tyson Foods Inc. (TSN, Financial)
Tyson is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio and insufficient earnings stability over the last 10 years. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be undervalued after growing its EPSmg from $1.7 in 2013 to an estimated $4 for 2017. This level of demonstrated earnings growth outpaces the market's implied estimate of 3.43% 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.
At the time of valuation, further research into Tyson revealed the company was trading above its Graham Number of $55.42. The company pays a dividend of 60 cents per share, for a yield of 1%. Its PEmg was 15.37, below the industry average of 34.94, 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 $-21.1. (See the full valuation)
Motorola Solutions Inc. (MSI, Financial)
Motorola Solutions is suitable for the Enterprising Investor but not 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, the poor dividend history and the high PEmg and P/B ratios. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be undervalued after growing its EPSmg from $1.38 in 2012 to an estimated $3.82 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 6.76% annual earnings growth over the next seven to 10 years. As a result, the valuation mode returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Motorola Solutions revealed the company was trading above its Graham Number of $0. The company pays a dividend of $1.64 per share, for a yield of 2%. Its PEmg was 22.02, 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 $-32.28. (See the full valuation)
What do you think? Are these companies a good value for Defensive Investors and Enterprising Investors? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclosure: 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.
