The market is filled with companies with a lot of hype 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. By using the ModernGraham Valuation Model, I've selected five of the most overvalued companies reviewed by ModernGraham.
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 therefore 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.
Apollo Education Group Inc. (APOL, Financial)
Apollo Education Group 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, low current ratio, insufficient earnings stability or growth over the last 10 years, the poor dividend history and the high PEmg ratio. 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 following the ModernGraham approach 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 $3.19 in 2013 to an estimated 23 cents for 2017. This level of demonstrated earnings growth does not support the market's implied estimate of 17.68% 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 Apollo Education Group revealed the company was trading above its Graham Number of $0. The company does not pay a dividend. Its PEmg (price over earnings per share - ModernGraham) was 43.85, which was above the industry average of 21.9. Finally, the company was trading above its NCAV of $1.35. (See the full valuation)
Becton Dickinson and Co. (BDX, Financial)
Becton Dickinson and 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 growth over the last 10 years and the high PEmg and PB 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 following the ModernGraham approach 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 $5.84 in 2013 to an estimated $4.93 for 2017. This level of demonstrated earnings growth does not support the market's implied estimate of 12.77% 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 Becton Dickinson and Co. revealed the company was trading above its Graham Number of $66.55. The company pays a dividend of $2.64 per share, for a yield of 1.6%. Its PEmg (price over earnings per share - ModernGraham) was 34.04, which was above the industry average of 32.29. Finally, the company was trading above its NCAV of $-53.26. (See the full valuation)
Cliffs Natural Resources Inc. (CLF, Financial)
Cliffs Natural Resources 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 stability or growth over the last 10 years, the poor dividend history and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the net 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 following the ModernGraham approach 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 $2.99 in 2012 to an estimated $-10.78 for 2016. This level of negative earnings does not support a positive valuation. 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 Cliffs Natural Resources revealed the company was trading above its Graham Number of $0. The company does not pay a dividend. Its PEmg (price over earnings per share - ModernGraham) was -0.89, which was below the industry average of 35.02. Finally, the company was trading above its NCAV of $-12.69. (See the full valuation)
Clearwater Paper Corp. (CLW, Financial)
Clearwater Paper 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, low current ratio, insufficient earnings stability or growth over the last 10 years, the poor dividend history and the high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the net 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 following the ModernGraham approach 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 $3.04 in 2012 to an estimated $2.61 for 2016. This level of demonstrated earnings growth does not support the market's implied estimate of 7.88% 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 Clearwater Paper revealed the company was trading above its Graham Number of $43.96. The company does not pay a dividend. Its PEmg (price over earnings per share - ModernGraham) was 24.25, which was below the industry average of 28.3, 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 $-39.67. (See the full valuation)
A Schulman Inc. (SHLM, Financial)
A Schulman 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, low current ratio, insufficient earnings stability or growth over the last 10 years and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the net 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 a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $1.22 in 2013 to an estimated $-2.14 for 2017. This level of negative earnings does not support a positive valuation. 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 A Schulman revealed the company was trading above its Graham Number of $15.95. The company pays a dividend of 82 cents per share, for a yield of 2.4%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share - ModernGraham) was -16.05, which was below the industry average of 22.46. Finally, the company was trading above its NCAV of $-29.84. (See the full valuation)
Disclaimer:
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.
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