The market is filled with companies with a lot of hype which 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. This is a sample of one screen that is included in ModernGraham Stocks & Screens, which is available for premium subscribers and is a great resource for selecting better opportunities. 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.
Level 3 Communications Inc. (LVLT)
Level 3 Communications Inc. does not qualify for either the Defensive Investor and the Enterprising Investor. The Defensive Investor is concerned with the low current ratio, lack of dividends, high PEmg and PB ratios, as well as the insufficient earnings stability or growth over the last ten years. The Enterprising Investor is concerned with the level of debt relative to the current assets, the lack of earnings stability over the last five years, and the lack of dividends. As a result, all value investors following the ModernGraham approach based on Benjamin Graham's methods should explore other opportunities or proceed with a speculative attitude. As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from a loss of $5.61 in 2011 to an estimated gain of $0.10 for 2015. This level of demonstrated earnings growth does not support the market's implied estimate of 273.67% 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 falling below the price. (See the full valuation)
