While ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself.  With that in mind, this article will take a brief look at the best value stocks of the IT Hardware industry, selecting the five most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.

Out of the more than 500 companies reviewed by ModernGraham, 35 were identified as being closely related to the financial services industry.  Of those, only three are suitable for the Defensive Investor, twenty-three are suitable for the Enterprising Investor, and the remaining nine are considered speculative at this time.  Excluding any extreme outliers, the average company was rated as being priced at 127.16% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 23.98.  The industry as a whole, therefore would appear to be overvalued, particularly in comparison to the market (see Mr. Market’s Mental State).

The Elite

The following companies have been rated as the most undervalued and suitable for either the Defensive Investor or the Enterprising Investor:

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 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 $4.94 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.98% 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.  (See the full valuation)

SanDisk Corporation (SNDK)

SanDisk Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, insufficient earnings growth or stability over the last ten years, and 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 $2.04 in 2011 to an estimated $3.20 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 3.61% 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.  (See the full valuation)

Seagate Technology PLC (STX)

Seagate Technology PLC qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years, the short dividend history, and the high PB ratio.  The Enterprising Investor is only initially concerned with the level of debt relative to the net current assets.  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.