10 Companies Benjamin Graham Would Invest In Today – July 2015

Out of the multitude of companies, which ones would legendary value investor Benjamin Graham buy today? I’ve compiled ten great companies that fit the ModernGraham criteria, based on Benjamin Graham’s methods. The companies in this list pass the rigorous requirements of either the Defensive Investor or the Enterprising Investor and are undervalued by the market. To find more companies that meet these tests, be sure to check out the ModernGraham Valuation Index.

Here are the ten companies Benjamin Graham would invest in today:

Aflac Inc. (AFL)

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Aflac passes the initial requirements of both the Defensive Investor and the Enterprising Investor. In fact, the company passes every requirement of both investor types, which is a rare accomplishment indicative of the company’s strong financial position. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $3.89 in 2011 to an estimated $6.13 for 2015. This is a fairly strong level of demonstrated growth, and outpaces the market’s implied estimate for annual earnings growth of only 0.87% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged around 11.5% annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that Aflac is significantly undervalued at the present time.  (See the full valuation)

American International Group (AIG)

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American International Group Inc. qualifies for the Enterprising Investor but not the Defensive Investor. The Defensive Investor is concerned by the inconsistent dividend history, as well as the lack of earnings stability or growth over the last ten years, while the company passes all of the Enterprising Investor’s requirements.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from a loss of $109.06 in 2011 to an estimated gain of $5.14 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 1.56% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price.  (See the full valuation)

Caterpillar Inc. (CAT)

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Caterpillar Inc. passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only initial concern is the low current ratio, and while the Enterprising Investor is concerned by the level of debt relative to the current assets, those concerns are overlooked since the company meets the more conservative Defensive Investor criteria. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

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Disclaimer: The author did not hold a position in any of the companies listed in this article ...

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Serenity Stocks 3 years ago Member's comment

The ModernGraham website cites the following formula as one of the Graham methods applied:

Intrinsic Value = EPS x (8.5 + 2xGrowth)

Benjamin Graham actually gave several warnings with this formula and only used it to demonstrate that the market's growth rate expectations were never reliable. But due to an omission in recent editions of The Intelligent Investor, this formula is often mistakenly used today to value stocks instead of Graham's actual (and more thorough) methods.

Benjamin Graham - also known as The Dean of Wall Street - was a scholar and financial analyst who mentored legendary investors such as Warren Buffett, William J. Ruane, Irving Kahn and Walter J. Schloss.

Warren Buffett wrote the preface for Graham's book - The Intelligent Investor - in which he calls it "by far the best book about investing ever written."

Graham's first recommended strategy - for novice investors - was to invest in Index stocks.

For more serious investors, Graham recommended three different categories of stocks - Defensive, Enterprising and NCAV - and 17 qualitative and quantitative rules for identifying them.

For professional investors, Graham described various special situations or "workouts".

Warren Buffett once gave a speech at Columbia Business School explaining how Graham's record of creating exceptional investors (such as Buffett himself) is unquestionable, and how Graham's principles are everlasting. The speech is now known as "The Superinvestors of Graham-and-Doddsville".

Dan Jackson 3 years ago Member's comment

Your 'full valuations' are all for May - how come you are specifying this (title) as for July? None of these have changed at all in two months?

Benjamin Clark 3 years ago Author's comment

My valuations are updated on a quarterly basis for all companies meeting the requirements of either the Defensive Investor or the Enterprising Investor. Intrinsic value should not be updated more frequently than that.

The list is updated every month to screen for ten of the best companies I've reviewed. This particular list takes into account discount to intrinsic value, Price/EPSmg ratio, and dividend yields. Since all of those figures change as the market price changes, the list is different each month.