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Jonathan Poland
Jonathan Poland
Articles (505)  | Author's Website |

2 Low-Risk, Undervalued Blue Chips

With uncertainty in the global market, Deere and Cummins can serve as a low-risk place to park cash

September 18, 2015 | About:

Stock prices are off close to 200 points today, as the Fed holds key interest rates at 0.25% (effectively zero), which to many should have caused more buying than selling. Of course, this move was expected considering the debt the U.S. faces along with the trade deficits.

Current national debt: $16 trillion
Annual trade deficit: $500 billion

Even with the market down 6% in the last month, there just doesn’t seem to be many undervalued stocks right now. And, outside of following Warren Buffett (Trades, Portfolio)’s bargain picks (IBM looks attractive at $145), an investor who's fully vested could be well served to just wait.

If you’re not fully vested, however, the following companies should serve as safe bets to beat inflation and the market over the mid to long-term based on their price and fundamentals.

They are:

  1. Deere & Co. (NYSE:DE)
  2. Cummins Inc. (NYSE:CMI)

Let’s look briefly at each. All prices are as of 11:29 a.m. EST.

Deere & Co. (NYSE:DE)
Recent Price: $79.95
DCF Value: $119.90

Founded in 1837, Deere’s brand name continues to be synonymous with excellence in agricultural equipment. The company generates 80% of sales from this segment and more than 50% of sales from the North American market. It has a large moat based on the brand name, but farming isn’t what it used to be.

In the last decade, Deere’s growth has been slow.

  • Sales are up 64%
  • Net income up 116%
  • Book value up 116%

The company has been doing what it can with share buy backs and increased dividends to continue growing its stock value. The stock has increased from $30 a share in 2005 to $80 currently. That handily beats the S&P 500, and with the current drop in price from the mid-90’s, it’s a great buy-in for the patient investor. Plus, comparing the company to the other alternative Caterpillar (CAT), buying Deere looks like a steal at this price.

Don’t just take my word for it. Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway owns over 17 million shares (5% of the company) along with James Barrow (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), and Brian Rogers (Trades, Portfolio).

Cummins Inc. (NYSE:CMI)
Recent Price: $116.53
DCF Value: $219.34

Cummins Inc. is a global diesel engine manufacturer with a very narrow margin of safety. The company designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products. It sells to original equipment manufacturers (OEMs), distributors and others through a network of around 600 company-owned and independent distributor locations and around 7,200 dealer locations in more than 190 countries. It enjoys 40% of the North American market in the heavy-duty over-the-road engine industry.

Cummins is a steady growth business. Here are its decade stats:

  • Sales are up 93%
  • Net income up 200%
  • Book value up 349%

They’ve also done a great job buying back close to 10% of the shares outstanding, boosting both earnings and book value per share. The stock value has followed suit, jumping from the low-20’s in 2005 to over $115 currently. And, just like Deere, the stock is down around 15% in the last quarter, giving smart investors (like you?) the opportunity to get in at a good price.

If you're the type of investor who likes dividends, Cummin's yield could reach north of 4% this year. A yield that would be equivalent to 19% this year if you owned the stock for the last decade.

In closing, while these two stocks are unlikely to double in value this year or over the next three years, they will provide safety, growth in dividends and price appreciation over the longer term.

About the author:

Jonathan Poland
I spent more than 15 years helping DIY investors earn over 30% a year. Today, I help business leaders take those insights and build better assets. I rarely write about stocks that I own. Thanks for reading. Do your own analysis before investing.

Visit Jonathan Poland's Website


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