5 Undervalued Companies for Enterprising Investors

NEW YORK (TheStreet) -- It's hard to find value in companies today.

By using the ModernGraham Valuation Model, I've selected the five most undervalued companies. Each company has been determined to be suitable for the enterprising investor according to the ModernGraham approach, based on Benjamin Graham's methods. Enterprising investors are able to do substantial research and can select companies that present a moderate (though still low) amount of risk. You may also be interested in reviewing "5 Undervalued Companies for the Defensive Investor," which presents options for more conservative, less research-oriented investors.

This month, Apple (AAPL) has dropped off the list and is replaced by Discover Financial Services (DFS).

1. Ford Motor

Ford Motor (F) remains unsuitable for the defensive investor due to its lack of stability in earnings and dividends over the ten year period. The enterprising investor looks at a much shorter time horizon, though, and the company passes all of the requirements for this investor type.

As for a valuation, the company performs well after growing its EPSmg (normalized earnings) from -$3.60 in 2008 to $2.23 for 2013. This solid level of growth is not reflected in the market, as the market is currently implying a growth rate estimate of -0.70%.  In other words, the market price indicates an expectation that the company's EPSmg will shrink by 0.70% annually over the next 7 to 10 years. Clearly this assumption is not supported by the historical achievements of the company, and our valuation model accordingly returns an intrinsic value estimate that exceeds the market price. 

F Chart

F data by YCharts

2. Freeport-McMoRan Copper & Gold

FreePort-McMoran (FCX) has not consistently paid dividends over the last ten years, and it has not shown earnings stability over the last ten years. But it does pass the requirements of the enterprising investor, though it has a higher level of debt relative to current assets than the investor type likes to see. 

From a valuation perspective, the stock is affected significantly by the large earnings loss in 2008, which has caused the EPSmg (normalized earnings) figure for 2009 to be very low in relation to 2013. As it stands, the EPSmg has grown from -$1.67 to $3.48, indicating a high level of growth that would appear to significantly outpace the market's implied estimate of 0.76% earnings growth. This has led the model to return an intrinsic value estimate that is well above the market price, and the overall result that the company is undervalued is supported by the valuation based on only 3% growth.

FCX Chart

FCX data by YCharts

3. Capital One Financial

Capital One Financial (COF) is a great company, but it has not shown big growth in its earnings over the 10-year historical period. But enterprising investors should feel very comfortable proceeding with further research into the company and comparing it to competitors like JPMorgan Chase (JPM).  

From the valuation side of things, the company appears to be significantly undervalued after growing its EPSmg (normalized earnings) from $3.14 in 2009 to $6.56 for 2013. This solid level of demonstrated growth surpasses the market's implied estimate of 1.67% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.

COF Chart

COF data by YCharts

4. Discover Financial Services

Discover Financial Services (DFS) is a company that is intriguing. The company has a short history as a publicly traded company and has yet to establish much dividend history. But enterprising investors following the Benjamin Graham approach should feel comfortable proceeding with further research into the company. Compare Discover, for example, to other opportunities such as Wells Fargo (WFC).

As for the valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.78 in 2010 to an estimated $4.51 for 2014.  This solid level of demonstrated growth more than supports the market's implied estimate of 2.21% earnings growth and leads our valuation model to return an estimate of intrinsic value that is well above the market price.

DFS Chart

DFS data by YCharts

5. Gannett

Gannett (GCI) has a low current ratio and a lack of earnings stability and growth over the last 10 years. But that is fine with the enterprising investor with a shorter time horizon, despite concerns over the high level of debt relative to the net current assets. Go ahead and proceed with further research into the company.

From the valuation side of things, the company appears to be significantly undervalued after growing its EPSmg (normalized earnings) from -$3.75 in 2010 to an estimated $2.06 for 2014.  This solid level of demonstrated growth leads our valuation model to return an estimate of intrinsic value that is well above the market price.


GCI Chart

GCI data by YCharts

What do you think?  Are these companies a good value for Enterprising Investors? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

At the time of publication, the author held Ford and Apple, but held no positions in any of the other stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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