There are a number of great companies in the market today. By 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 1 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 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!
Tyson Foods Inc. (TSN, Financial)
Tyson Foods Inc. 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, and the high PEmg and price-book 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 (normalized earnings) from $1.28 in 2012 to an estimated $3.17 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 7.76% 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 Tyson Foods Inc. revealed the company was trading above its Graham Number of $52.23. The company pays a dividend of 55 cents per share for a yield of 0.7%. Its PEmg (price over earnings per share) was 24.01, below the industry average of 30.19, 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 $-19.94. (See the full valuation)
Equity Residential (EQR, Financial)
Equity Residential qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be undervalued after growing its EPSmg from $2.15 in 2012 to an estimated $5.79 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.39% 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 Equity Residential revealed the company was trading below its Graham Number of $90.07. The company pays a dividend of $2.11 per share for a yield of 3.2%, putting it among the best dividend paying stocks today. Its PEmg was 11.29, below the industry average of 34.03, 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 $-24.85. (See the full valuation)
Motorola Solutions Inc. (MSI, Financial)
Motorola Solutions Inc. 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 P/B ratio. 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 $4.06 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 4.8% 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 Motorola Solutions Inc. revealed the company was trading above its Graham Number of $0. The company pays a dividend of $1.5 per share for a yield of 2%. Its PEmg was 18.11, below the industry average of 35.13, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its net current asset value (NCAV) of $-29.35. (See the full valuation)
Starwood Property Trust Inc. (STWD, Financial)
Starwood Property Trust Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last 10 years and the poor dividend history. The Enterprising Investor has no initial concerns. 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 $1.17 in 2012 to an estimated $1.98 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.4% 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 Starwood Property Trust Inc. revealed the company was trading below its Graham Number of $27.64. The company pays a dividend of $1.92 per share for a yield of 8.6%, putting it among the best dividend paying stocks today. Its PEmg was 11.3, below the industry average of 34.03, which by some methods of valuation makes it one of the most undervalued stocks in its industry. (See the full valuation)
CIGNA Corp. qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company's strong financial position. The Enterprising Investor has no initial concerns. As a result, all value investors should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be undervalued after growing its EPSmg from $4.84 in 2012 to an estimated $7.82 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 3.87% annual earnings growth over the next seveb to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price. (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:Â The author held a long position in Starwood Property Trust Inc. (STWD, Financial) but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.
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