We evaluated 20 different companies this week to determine whether they are suitable for Defensive Investors, those unwilling to do substantial research, or Enterprising Investors, those who are willing to do such research. We also put each company through the ModernGraham valuation model based on Benjamin Graham’s value investing formulas in order to determine an intrinsic value for each. Out of those 20 companies, only 13 were found to be undervalued or fairly valued and suitable for either Defensive or Enterprising Investors.

The Elite

The following companies were found to be suitable for either the Defensive Investor or Enterprising Investor and undervalued:

Arrow Electronics Inc (ARW)

Arrow Electronics Inc qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, the insufficient earnings stability over the last ten years, and the lack of dividends.  The Enterprising Investor is only initially concerned by the lack of dividends . As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.54 in 2011 to an estimated $4.82 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.5% annual earnings growth over the next 7-10 years.As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. 

Citigroup Inc (C)

Citigroup Inc qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings growth or stability over the last ten years along with the inconsistent dividend history.  The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $6.47 in 2011 to an estimated gain of $3.81 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.66% annual earnings growth over the next 7-10 years.As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. 

Cummins Inc (CMI)

Cummins Inc qualifies for both the Enterprising Investor and the more conservative Defensive Investor.  The company passes all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $5.78 in 2011 to an estimated $8.71 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.77% annual earnings growth over the next 7-10 years.As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

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