The market is filled with hyped-up companies 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.Â
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 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.
Adobe Systems Inc. (ADBE, Financial)
Adobe Systems Inc. does not satisfy the requirements of 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, the poor dividend history, and the high PEmg and price-book (P/B) ratios. The Enterprising Investor has concerns regarding the lack of earnings growth over the last five years and the lack of dividends. As a result, all value investors 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 $1.49 in 2012 to an estimated $1.42 for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 31.11% 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 below the price.
At the time of valuation, further research into Adobe Systems Inc. revealed the company was trading above its Graham Number of $27.95. The company does not pay a dividend. Its PEmg (price over earnings per share) was 70.71, above the industry average of 36.31. Finally, the company was trading above its net current asset value (NCAV) of $0.54. (See the full valuation)
Regal Beloit Corp. (RBC, Financial)
Regal Beloit Corp. does not satisfy the requirements of 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 ratio. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets and the lack of earnings growth over the last five years. As a result, all value investors 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 decline from $3.93 in 2012 to an estimated $3.1 for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 6.04% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Regal Beloit Corp. revealed the company was trading below its Graham Number of $66.35. The company pays a dividend of 93 cents per share for a yield of 1.5%. Its PEmg was 20.57, below the industry average of 20.76, 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 $-19.82. (See the full valuation)
Newfield Exploration Co. (NFX, Financial)
Newfield Exploration Co. 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 over the last 10 years, the poor dividend history, and the high PEmg and P/B ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, the lack of earnings stability or growth over the last five years and the lack of dividends. As a result, all value investors 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 decline from $-1.84 in 2012 to an estimated $-7.12 for 2016. This level of negative earnings does not support a positive valuation. As a result, the valuation model returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Newfield Exploration Co. revealed the company was trading above its Graham Number of $0. The company does not pay a dividend. Finally, the company was trading above its net current asset value (NCAV) of $-14.02. (See the full valuation)
CEVA Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, insufficient earnings stability or growth over the last 10 years, the poor dividend history, and the high PEmg and P/B ratios. The Enterprising Investor has concerns regarding the lack of earnings stability or growth over the last five years and the lack of dividends. As a result, all value investors 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 decline from 59 cents in 2012 to an estimated 35 cents for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 37.83% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value below the price.
At the time of valuation, further research into CEVA Inc. revealed the company was trading above its Graham Number of $11.51. The company does not pay a dividend. Its PEmg was 84.16, above the industry average of 22.64. Finally, the company was trading above its net current asset value (NCAV) of $5.04. (See the full valuation)
Equinix Inc. (EQIX, Financial)
Equinix Inc. 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, the poor dividend history, and the high PEmg and P/B ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets and the lack of earnings stability over the last five years. As a result, all value investors 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 from $1.99 in 2012 to an estimated $2.81 for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 60.56% annual earnings growth over the next seven to 10 years. As a result, the valuation mode returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Equinix Inc. revealed the company was trading above its Graham Number of $105.77. The company pays a dividend of $6.88 per share for a yield of 1.9%. Its PEmg was 129.62, above the industry average of 35.13. Finally, the company was trading above its net current asset value (NCAV) of $-91.92. (See the full valuation)
What do you think? Are these companies a bad opportunity for intelligent 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 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.
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