There are a number of great companies in the market today. By using the ModernGraham Valuation Model, I've selected the five undervalued companies reviewed by ModernGraham trading closest to their 52-week lows. Each of these companies has been determined to be suitable for 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. Defensive Investors may also be interested in reviewing 5 Undervalued Companies for the Defensive Investor Near 52 Week Lows –Â August 2015 while also conducting further research into the following companies.
Here are the 5 Undervalued Companies for Enterprising Investors Near 52 Week Lows:
Whole Foods Market
Whole Foods Market Inc. (WFM, Financial) is not suitable for Defensive Investors but it does pass the initial requirements of the Enterprising Investor. The Defensive Investor is concerned with the low current ratio, the inconsistent dividend history and the high PEmg and PB ratios, while the Enterprising Investor is only initially concerned with the low current ratio. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company's intrinsic value.
When it comes to that valuation, it is critical to consider the company's earnings history. In this case, it has grown its EPSmg (normalized earnings) from $0.70 in 2011 to an estimated $1.51 for 2015. This is a robust level of demonstrated growth and outpaces the market's implied estimate for annual earnings growth of 7.79% over the next 7-10 years.
In recent years, the company's actual growth in EPSmg has averaged around 23% annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that Whole Foods is significantly undervalued at the present time. (See the full valuation)
Starwood Property Trust Inc.
Starwood Property Trust Inc. (STWD, Financial) qualifies for the Enterprising Investor but not the Defensive Investor. The Defensive Investor is concerned by the short history as a publicly traded company, while the company passes all of the Enterprising Investor's requirements. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.
As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $0.76 in 2011 to an estimated $1.98 for 2015. This level of demonstrated growth is greater than the market's implied estimate of 1.18% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham's formula, to return an estimate of intrinsic value above the market price. (See the full valuation)
Gap Inc.
Gap Inc. (GPS, Financial) is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned by the low current ratio and the high PB ratio, while the Enterprising Investor has no initial concerns. Therefore, all Enterprising Investors should feel very comfortable proceeding with the next stage of the analysis, which is a determination of an estimate of intrinsic value.
From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $1.59 in 2012 to an estimated $2.63 for 2016. This level of demonstrated growth outpaces the market's implied estimate for earnings growth of 2.94% over the next 7-10 years.
The company's recent earnings history shows an average annual growth in EPSmg of around 13%. The ModernGraham valuation model reduces such a rate to a more conservative figure, assuming some slowdown will occur, but still returns an estimate of intrinsic value well above the current price, indicating Gap Inc. is significantly undervalued at the present time. (See the full valuation)
Tegna Inc. (TGNA, Financial)
Tegna Inc. (TGNA) qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings growth or stability over the last ten years along with the low current ratio. The Enterprising Investor is concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with the evaluation.
As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $2.00 in 2011 to an estimated gain of $2.50 for 2015. This level of demonstrated earnings growth surpasses the market's implied estimate of 1.06% 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. (See the full valuation)
BorgWarner Inc.
BorgWarner (BWA, Financial) is not suitable for Defensive Investors but it does pass the initial requirements of the Enterprising Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, the inconsistent dividend history, and the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company's intrinsic value.
When it comes to that valuation, it is critical to consider the company's earnings history. In this case, it has grown its EPSmg (normalized earnings) from $1.24 in 2011 to an estimated $2.76 for 2015. This is a fairly strong level of demonstrated growth, and outpaces the market's implied estimate for annual earnings growth of 4.91% over the next 7-10 years.
In recent years, the company's actual growth in EPSmg has averaged nearly 25% annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that BorgWarner is significantly undervalued at the present time. (See the full valuation)
What do you think? Are these companies a good value for Enterprising Investors? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
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Disclaimer: 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 those holdings within the next 72 hours.
