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Benjamin Clark
Benjamin Clark
Articles (298)  | Author's Website |

5 Speculative and Overvalued Companies to Avoid - July

Value investors should approach these stocks with caution

July 17, 2016 | About:

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:

Hershey Co. (NYSE:HSY)

Hershey does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.48 in 2012 to an estimated $3.45 for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 11.43% 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.
 

Noble Energy Inc. (NYSE:NBL)

Noble Energy does not satisfy the requirements of either the Enterprising Investor or 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, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $1.9 in 2012 to losses of 97 cents for 2016. This level of negative earnings does not support a positive valuation. As a result, the ModernGraham valuation model, based on Benjamin Graham's formula, returns an estimate of intrinsic value below the price.
 

Diamond Offshore Drilling Inc. (NYSE:DO)

Diamond Offshore Drilling does not satisfy the requirements of either the Enterprising Investor or 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, and the high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $6.89 in 2012 to an estimated $1.03 for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 7.96% 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.
 

PepsiCo Inc. (NASDAQ:PEP)

PepsiCo does not satisfy the requirements of 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 and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $3.88 in 2012 to an estimated $4.14 for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 8.97% 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.
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ONEOK Inc. (NYSE:OKE)

ONEOK does not satisfy the requirements of 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 and PB ratios. The Enterprising Investor has concerns regarding 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 should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $1.62 in 2012 to an estimated $1.33 for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 14.03% 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.
 

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 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.

About the author:

Benjamin Clark
Benjamin is one of TipRank's top bloggers. He is the founder of ModernGraham.com, a value investing website devoted to the study and modernization of the teachings of Benjamin Graham.

Visit Benjamin Clark's Website


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