5 Overvalued Dow Components

ModernGraham valuation model reveals top picks for January

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Benjamin Clark
Jan 04, 2019
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There are so many great companies in the market today, but there are also many overvalued companies. By using the ModernGraham Valuation Model, I've selected five overvalued Dow Components for investors to consider.

Defensive Onvestors are defined as investors who 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. Only speculators should pursue companies not suitable for either type of investor.

Chevron Corp. (

CVX, Financial)

Chevron 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 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 valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $11.43 in 2014 to an estimated $5.06 for 2018. This level of demonstrated earnings growth does not support the market's implied estimate of 7.57% 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 Chevron revealed the company was trading below its Graham Number of $121.52. The company pays a dividend of $4.32 per share, for a yield of 3.6%, putting it among the best dividend-paying stocks today. Its PEmg (price over earnings per share) was 23.64, below the industry average of 60.49, 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 $-34.6.

Chevron performs fairly well in the ModernGraham grading system, scoring a B-.

Exxon Mobil Corp. (

XOM, Financial)

Exxon Mobil 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 and insufficient earnings growth over the last 10 years. 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 should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for valuation, the company appears to be overvalued after seeing its EPSmg decline from $7.98 in 2014 to an estimated $4.14 for 2018. This level of demonstrated earnings growth does not support the market's implied estimate of 5.28% 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 Exxon Mobil revealed the company was trading above its Graham Number of $67.18. The company pays a dividend of $3.06 per share, for a yield of 3.9%, putting it among the best dividend-paying stocks today. Its PEmg was 19.07, below the industry average of 50.98, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its NCAV of $-24.31.

Exxon Mobil scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

The Coca-Cola Co. (

KO, Financial)

Coca-Cola 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 price-book 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 should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for valuation, the company appears to be overvalued after seeing its EPSmg decline from $1.85 in 2014 to an estimated $1.36 for 2018. This level of demonstrated earnings growth does not support the market's implied estimate of 14.04% 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 Coca-Cola revealed the company was trading above its Graham Number of $13.29. The company pays a dividend of $1.48 per share, for a yield of 3%, putting it among the best dividend-paying stocks today. Its PEmg was 36.58, which was above the industry average of 25.8. Finally, the company was trading above its NCAV of $-7.75.

Coca-Cola receives an average overall rating in the ModernGraham grading system, scoring a C-.

Merck & Co. Inc. (

MRK, Financial)

Merck 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 price-book 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 should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for valuation, the company appears to be overvalued after seeing its EPSmg decline from $2.44 in 2014 to an estimated $1.86 for 2018. This level of demonstrated earnings growth does not support the market's implied estimate of 16.16% 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 Merck revealed the company was trading above its Graham Number of $27.34. The company pays a dividend of $1.89 per share, for a yield of 2.5%, putting it among the best dividend-paying stocks today. Its PEmg was 40.82, which was above the industry average of 36.89. Finally, the company was trading above its NCAV of $-9.57.

Merck scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Caterpillar Inc. (

CAT, Financial)

Caterpillar 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 price-book 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 should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for valuation, the company appears to be overvalued after seeing its EPSmg decline from $5.79 in 2014 to an estimated $4.86 for 2018. This level of demonstrated earnings growth does not support the market's implied estimate of 8.81% 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 Caterpillar revealed the company was trading above its Graham Number of $75.93. The company pays a dividend of $3.1 per share, for a yield of 2.4%, putting it among the best dividend-paying stocks today. Its PEmg was 26.12, below the industry average of 31.29, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its NCAV of $-39.81.

Caterpillar scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Disclosure: 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.

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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.