There are a number of great companies in the market today. By using the ModernGraham valuation model, I've selected five undervalued companies with the highest beta.
A company's beta indicates the correlation at which its price moves in relation to the market. A beta greater than 1 indicates a company is more volatile than the market.
Each company has been determined to be suitable for 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 select companies that present a moderate (though still low) amount of risk.
Lincoln National Corp. (LNC, Financial)
Lincoln National is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last 10 years. The Enterprising Investor has no initial concerns. As a result, all Enterprising 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 $4.25 in 2014 to an estimated $7.01 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 0.58% annual earnings loss 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 above the price.
At the time of valuation, further research into Lincoln National revealed the company was trading below its Graham number of $117.31. The company pays a dividend of 87 cents per share, for a yield of 1.7%. Its PEmg (price over earnings per share) was 7.33, below the industry average of 30.63, which by some methods of valuation makes it one of the most undervalued stocks in its industry.
Lincoln National performs fairly well in the ModernGraham grading system, scoring a B+.
Ameriprise Financial Inc. (AMP, Financial)
Ameriprise Financial 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 valuation, the company appears to be undervalued after growing its EPSmg from $6.29 in 2014 to an estimated $10.35 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.23% 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 Ameriprise Financial revealed the company was trading above its Graham number of $112.58. The company pays a dividend of $3.24 per share, for a yield of 2.9%, putting it among the best dividend-paying stocks today. Its PEmg was 10.96, below the industry average of 18, which by some methods of valuation makes it one of the most undervalued stocks in its industry.
Ameriprise Financial performs fairly well in the ModernGraham grading system, scoring a B+.
Packaging Corp of America (PKG, Financial)
Packaging Corp Of America 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 should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg from $3.21 in 2014 to an estimated $6.28 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 3.21% 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 Packaging Corp Of America revealed the company was trading above its Graham number of $63.49. The company pays a dividend of $2.52 per share, for a yield of 2.7%, putting it among the best dividend-paying stocks today. Its PEmg was 14.93, below the industry average of 15.32, 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 $-19.74.
Packaging Corp Of America performs fairly well in the ModernGraham grading system, scoring a B+.
BorgWarner Inc. (BWA, Financial)
BorgWarner is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio and poor dividend history. 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 $2.58 in 2015 to an estimated $3.51 for 2019. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.72% 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 BorgWarner revealed the company was trading below its Graham number of $43.32. The company pays a dividend of 68 cents per share, for a yield of 1.6%. Its PEmg was 11.93, below the industry average of 21.23, 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 $-9.33.
BorgWarner performs fairly well in the ModernGraham grading system, scoring a B+.
Textron qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the insufficient earnings stability over the last 10 years. The Enterprising Investor has no initial concerns. 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 $1.7 in 2014 to an estimated $3.07 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 3.6% 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 Textron revealed the company was trading above its Graham number of $48.04. The company pays a dividend of 8 cents per share, for a yield of 0.2%. Its PEmg was 15.69, below the industry average of 47.17, 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 $-8.3.
Textron performs fairly well in the ModernGraham grading system, scoring a B.
What do you think? Are these companies a good value for Defensive Investors and Enterprising Investors? Is there a company you like better?
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.
