The market is filled with companies with a lot of hype 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. By using the ModernGraham Valuation Model, I've selected five of the most overvalued companies reviewed by ModernGraham.
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.
5 speculative and overvalued companies to avoid:
Netflix Inc. (NFLX, Financial)
Netflix does not qualify for either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned by the low current ratio, lack of dividends and high PEmg and PB ratios. The Enterprising Investor has concerns with the lack of dividends and lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach based on Benjamin Graham's methods should explore other opportunities at this time or proceed with a cautious speculative attitude.
As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from 40 cents in 2011 to an estimated 33 cents for 2015. This level of demonstrated earnings growth does not support the market's implied estimate of 160.59% 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 below the price. (See the full valuation)
Molson Coors Brewing Company (TAP, Financial)
Molson Coors Brewing Co. does not qualify for either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last 10 years, and the high PEmg ratio. The Enterprising Investor is concerned by the level of debt relative to the current assets and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach based on Benjamin Graham's methods should explore other opportunities at this time or proceed with a cautious speculative attitude.
As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $3.45 in 2011 to an estimated $2.71 for 2015. This level of demonstrated earnings growth does not support the market's implied estimate of 11.68% 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 below the price. (See the full valuation)
News Corporation does not qualify for either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the short history in its most recent business structure and the high PEmg ratio. The Enterprising Investor is concerned by the insufficient earnings stability over the last five years and the lack of dividends. As a result, all value investors following the ModernGraham approach based on Benjamin Graham's methods should explore other opportunities at this time or proceed with a cautious speculative attitude.
As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from a loss of $1.19 in 2012 to an estimated gain of 4 cents for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 173% 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 below the price. (See the full valuation)
Brown-Forman Corporation (BF.B, Financial)
Brown-Forman Corporation does not qualify for 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, and the high PEmg and PB ratios. The Enterprising Investor is concerned with the lack of earnings growth or stability over the last five years. As a result, all value investors following the ModernGraham approach based on Benjamin Graham's methods should explore other opportunities or proceed with a cautious speculative attitude.
As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $2.27 in 2012 to an estimated $1.99 for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 20.84% 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 below the price. (See the full valuation)
Staples Inc. (SPLS, Financial)
Staples Inc. does not qualify for either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth or stability over the last 10 years and the high PEmg ratio. The Enterprising Investor is concerned with the lack of earnings growth or stability over the last five years. As a result, all value investors following the ModernGraham approach based on Benjamin Graham's methods should explore other opportunities or proceed with a cautious speculative attitude.
As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $1.24 in 2012 to an estimated 51 cents for 2015. This level of demonstrated earnings growth does not support the market's implied estimate of 7.85% 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 below the price. (See the full valuation)
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. ModernGraham has no affiliation with the companies.
This article first appeared on ModernGraham.
