There are a number of great companies in the market today. By using the ModernGraham valuation model, I've 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 one 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 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.Â
H & R Block Inc. (HRB, Financial)
H & R Block qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the high price-book ratio. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.55 in 2015 to an estimated $2.05 for 2019. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.95% 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 H & R Block revealed the company was trading above its Graham Number of $8.61. The company pays a dividend of 96 cents per share for a yield of 3.8%, putting it among the best dividend-paying stocks today. Its PEmg (price over earnings per share) was 12.39, below the industry average of 18, 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 of $-6.68.
H & R Block performs fairly well in the ModernGraham grading system, scoring a B+.
LGI Homes Inc. (LGIH, Financial)
LGI Homes is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, insufficient earnings stability over the last 10 years and the poor dividend history. The Enterprising Investor is only concerned with the lack of dividends. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg from 74 cents in 2014 to an estimated $4.43 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 2.26% 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 LGI Homes revealed the company was trading above its Graham Number of $55.97. The company does not pay a dividend. Its PEmg was 13.01, below the industry average of 25.8, 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 $21.67.
LGI Homes performs fairly well in the ModernGraham grading system, scoring a B-.
Tyson Foods Inc. (TSN, Financial)
Tyson Foods is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio and insufficient earnings stability over the last 10 years. 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 valuation, the company appears to be undervalued after growing its EPSmg from $2.13 in 2014 to an estimated $5.52 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 2.07% 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 Tyson Foods revealed the company was trading below its Graham Number of $73.4. The company pays a dividend of 90 cents per share, for a yield of 1.3%. Its PEmg was 12.65, below the industry average of 24.35, 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 $-26.88.
Tyson Foods performs fairly well in the ModernGraham grading system, scoring a B+.Â
Constellation Brands Inc. (STZ, Financial)
Constellation Brands is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, poor dividend history 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 valuation, the company appears to be fairly valued after growing its EPSmg from $4.88 in 2015 to an estimated $8.7 for 2019. This level of demonstrated earnings growth supports the market's implied estimate of 8.5% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value within a margin of safety relative to the price.
At the time of valuation, further research into Constellation Brands revealed the company was trading above its Graham Number of $94.52. The company pays a dividend of $2.08 per share, for a yield of 0.9%. Its PEmg was 25.5, which was above the industry average of 24.61. Finally, the company was trading above its NCAV of $-45.22.
Constellation Brands performs fairly well in the ModernGraham grading system, scoring a B-.
Aaron's 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 is only concerned with the level of debt relative to the net current assets. As a result, all value investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg from $1.52 in 2014 to an estimated $2.87 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 2.84% 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 Aaron's revealed the company was trading below its Graham Number of $42.55. The company pays a dividend of 11 cents per share, for a yield of 0.3%. Its PEmg was 14.17, below the industry average of 37.1, 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 $-7.75.
Aaron's performs fairly well in the ModernGraham grading system, scoring an B.
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. Please be sure to review our detailed disclaimer. This article first appeared on ModernGraham.
