The Cheapest Stocks in the Dow

Many people (including investors) don't realize that the Dow Jones Industrial Average (INDEX: ^DJI) is made up of the stocks of just 30 companies. That's it -- 30.

Yet these 30 stocks make up more than a quarter of the total market value of the entire U.S. stock market!

These are big, important companies that, taken together, are integral to our economy and will be for years to come. And they're cheap!

Why? Because when you hear about the "lost decade" of close-to-zero returns over the last 10 years, it's these companies folks are talking about.

Yet while the stocks of the Dow haven't done much, many of their actual businesses have exploded. The result is that the 30 stocks in the Dow are now cheaper than the rest of the stock market.

Keep reading and I'll show you a table of all 30 Dow stocks, ranked by how cheaply they're trading. Then I'll highlight a few that look especially attractive.

Here's how cheap they are
To assess cheapness, we could look at trailing P/E ratios, but these only look at one year's worth of performance. Instead, let's use a five-year P/E ratio. In other words, today's price divided by the five-year average of earnings. Looking at five years balances the need to include good years and bad with the need to include timely data.

To put the numbers you're about to see in perspective, a regular one-year P/E ratio under 15 is pretty attractive. Seeing nearly half the Dow stocks with five-year P/E ratios under 15 is mouthwatering.

Company Name

5-Year P/E Ratio

Hewlett-Packard (NYSE: HPQ  )

6.6

The Travelers Companies

7.3

JPMorgan Chase (NYSE: JPM  )

9.2

ExxonMobil

10.6

Chevron

10.9

General Electric (NYSE: GE  )

11.0

Bank of America (NYSE: BAC  )

11.9

Microsoft (Nasdaq: MSFT  )

12.2

AT&T

12.5

Cisco Systems (Nasdaq: CSCO  )

13.5

Wal-Mart

14.0

Procter & Gamble

14.3

3M

14.4

Johnson & Johnson

14.5

Pfizer

15.0

Intel

15.4

Walt Disney

15.4

United Technologies

16.3

Boeing

16.3

DuPont

16.4

Home Depot

16.5

IBM

16.9

American Express

16.9

Merck

17.4

Kraft

19.5

Coca-Cola

20.2

Caterpillar

20.7

Alcoa

21.1

Verizon

21.2

McDonald's

22.2

Average

15.0

Source: S&P Capital IQ.

Looking down the list, I want to highlight two areas of the market: financials and tech. First, financials.

It may surprise you that JPMorgan and Bank of America have enough earnings power to support such low five-year P/E ratios. Remember, these earnings include all the write-offs they've been taking on their bad loans and derivatives due to the financial crisis. We also see low ratios for insurance giant Travelers and conglomerate GE, whose financial division terrified investors during the crisis.

I continue to think the financial sector is beaten down more than it should be due to the real risks involved with opaque balance sheets. Grabbing individual stocks in the financial sector isn't for everyone, but personally I own shares of JPMorgan and Bank of America.

Less opaque but still hard to predict is the tech sector. We see big tech players HP, Microsoft, and Cisco all trading for five-year P/E ratios under 15. Their balance sheets aren't the problem (in fact, Microsoft and Cisco have massive net cash balances), but investors are discounting the giants because competitive advantages in tech can disappear painfully quickly. Remember, Facebook is only seven years old.

That said, I personally own shares of Microsoft and Cisco because I think they're being written off too quickly. Meanwhile, HP remains on my watchlist because of its bargain-basement valuation, but so far I'm staying away because I'm not yet convinced they're operationally sound enough to warrant an investment. I don't know what the future of tech will hold, but at these prices, I'll take my chances with Microsoft and Cisco.

The bottom line
I highlighted the financial and tech sectors because of their especially low valuations, but the entire Dow list is a great place to start if you're looking for ideas. Even the most expensive stocks on the list aren't trading at insane multiples. For more detailed research, five of the 30 Dow stocks made the cut in our new free report, "Secure Your Future With 11 Rock-Solid Dividend Stocks." I invite you to take a free copy. To find out the names of the five stocks, just click here.

Anand Chokkavelu owns shares of JPMorgan, ExxonMobil, Bank of America, Microsoft, Cisco, Johnson & Johnson, Pfizer, Disney, and McDonald's. The Motley Fool owns shares of IBM, Microsoft, Bank of America, Johnson & Johnson, Cisco Systems, Wal-Mart Stores, Coca-Cola, JPMorgan Chase, and Intel. The Fool has also bought calls on Intel and created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores, Coca-Cola, Pfizer, Cisco Systems, McDonald's, The Home Depot, Johnson & Johnson, Intel, Procter & Gamble, Microsoft, 3M, Chevron, and Walt Disney. Motley Fool newsletter services have also recommended creating diagonal call positions in Johnson & Johnson, 3M, and Wal-Mart. Motley Fool newsletter services have further recommended creating bull call spread positions in Microsoft and Intel, as well as creating a write covered strangle position in American Express. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. As you've probably noticed, The Motley Fool has a disclosure policy.


Read/Post Comments (24) | Recommend This Article (100)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 07, 2011, at 4:25 PM, terryg99 wrote:

    Interesting article, but where are you getting your numbers?

    For instance, AA has trailing PE of 11.5, forward 10.5.

    Caterpilar is 14.6 trailing, with 10.6 forward.

    You've got them at $20+

    There may be others that are wrong, I just happen to own these. You need to get the facts correct.

  • Report this Comment On November 07, 2011, at 4:47 PM, EnigmaDude wrote:

    First comment missed the point of the article (did you even read it?). The PE ratios quoted are based on 5 year averages, which is why I like GE as a long-term investment. Wish I had been buying shares of Chevron when I first started working for them back in the 1980s - I would be living large by now if I had!

  • Report this Comment On November 07, 2011, at 5:16 PM, 102971 wrote:

    I have followed the Dogs of the Dow for the past three years and it has been very successful. It is likely that McDonalds & Chevron will drop out at the end of 2011 and be replaced by GE and Proctor & Gamble. I would like GE if they would break it up into its component parts. I calculate that it would then be worth over $40 a share but I don't think that's likely. I think that GE is a buy at below $15 but no higher. Very good article but I'm not sure that a five year p/e ratio means a great deal when you consider the past five years

  • Report this Comment On November 07, 2011, at 5:51 PM, TMFBomb wrote:

    @102971,

    "Very good article but I'm not sure that a five year p/e ratio means a great deal when you consider the past five years"

    Agreed that you have to go beyond the numbers...that's why, for example, I'm wary of HP even though it's the cheapest of the bunch on a 5-year P/E ratio.

    Fool on,

    Anand

  • Report this Comment On November 07, 2011, at 6:35 PM, LLWAS wrote:

    Trailing PE: whether one year or five years it's still the rearview mirror. Five year adds more historical detail, but is there evidence that it enhances predictability? Or even reveals anything about the current health of the company?

    I for one invest to enhance my retirement and I'm concerned about the present and the future. For example, there is evidence that GE financial holds a ton of toxic paper, which may come home to roost in the near future. That concerns me when I make decisions about my investments.

    Foolish is as Foolish does

  • Report this Comment On November 07, 2011, at 7:14 PM, PeakOilBill wrote:

    I don't own any stocks, but if you made me buy two, they would be Chevron and Exxon. Mother Nature isn't making any more oil that we have no substitute for and runs EVERYTHING.

  • Report this Comment On November 07, 2011, at 7:24 PM, colleran wrote:

    I have gotten rid of all my bank stocks. If you want to know why, watch the documentary 'Inside Job'. Evidently, the biggies have CDOs off their books (ala Enron) and have not written them and other assets to present value. No ethics to be found.

  • Report this Comment On November 07, 2011, at 8:09 PM, TheDumbMoney wrote:

    Bomb, I own twelve of them, including HPQ, which I just initiated at around $26/share in a 1/2 position. I totally get the concerns on HPQ, but on a FCF-basis it's very cheap to me, and I bought when it was revealed Whitman was reversing the moronic plan to unload the PC division. Steady return on assets. Recovering asset turnover. Steady/recovering net margin. Return on equity at an all-time high, juiced by extra leverage; but in 10 years return on equity has gone up 800%ish, which leverage is up around 40%. FCF has recovered in 2011 so far. Profits are at all-time nominal highs. From a story perspective, beyond the numbers, this is not the RIMM of the PC world. It is a vastly more diversified business. I always do more research before I double a position, but this looks cheap-cheap-cheap to me. I was waiting only to see if Whitman was a moron. Her decision on the PC business confirms she is not.

    I just think it's so hilarious that this stock trades at the same level it traded at in May 1997. Fourteen and a half years ago. Do theys gots problems? Fo sho. But at 6.3 times earnings, and at all time highs in net income/earnings, does not seem like a bad bet to me.

  • Report this Comment On November 07, 2011, at 8:57 PM, TMFBomb wrote:

    @dumberthanafool,

    I did like the reversal decision and I do get tempted by HP's super-low multiples on earnings and free cash flow. On the other hand, I did not like the Autonomy purchase.

    Still, as you say, HP is really cheap...it's one I continue to read about and watch.

    If you haven't read this article by Morgan Housel, check it out:

    http://www.fool.com/investing/general/2011/08/29/hp-and-the-...

    Fool on,

    Anand

  • Report this Comment On November 07, 2011, at 10:57 PM, TheDumbMoney wrote:

    Missed that, nice article. The list of crap purchases in the last year or two is actually quite long. NYT did a nice article on all the money they have blown in i-bankers to pay for advice on high-priced purchases, not just Autonomy, not just Palm, but others. Spilt milk, lots of it. But a company with a new CEO is not the same company. It's true when a good one leaves. But it's also true when a bad one leaves. The story is not yet written on Whitman (who is after all responsible for Ebay's dalliance with Skype; though Paypal also was hers and that was killer-good), but the decision to reverse the PC-split was so bold and correct I'm willing to give her the benefit of the doubt at 6.3x earnings. But again, totally understand the other side of the coin.

  • Report this Comment On November 08, 2011, at 12:51 AM, mikecart1 wrote:

    PE Ratios are so 1980s. In 2011, one doesn't look at ratios, financial statements, current company standing, bankruptcy chances, revenues, sales, or prospects. One looks for companies that are on the verge of bankruptcy or need a huge loan from the USA or even just need a really big break. See SIRI, LVS, BAC, C, and many others for example. :D

  • Report this Comment On November 08, 2011, at 8:49 AM, TMFBomb wrote:

    @dumberthanafool,

    You make sound points...I like your logic flow.

    Fool on,

    Anand

  • Report this Comment On November 08, 2011, at 10:04 AM, Brettze wrote:

    ALCOA is really the cheapest of all because aluminium prices are ridiculously low!! At $1 a pound, you still think it is appropriate at today's price??/ Look at all other metals already skyrocketing except aluminium.. Why? China still refuses to shut down many of its antiquated smelting plants even though it is building some new ones... China produces close to half of the world's aluminium every year. Most investors are just happy to see aluminium prices stuck at $1 a pound forever because they want General Electric, Boeing, Coca Cola , etc who uses cheap aluminium to fudge earnings a bit extra on the back of ALCOA!! I dont care what you think but I think aluminium prices ought to go up !!

  • Report this Comment On November 08, 2011, at 10:09 AM, Brettze wrote:

    Ten years ago, analysts used to downgrade copper miners because blah blah .. Now look at copper prices ??? Same for nickel, moly, silver ,gold etc... Why are we still pressing down hard on aluminium prices ??? This is soooo artificial !!! Free market ??? Supply and demand?? Oh sure !! Americans are supplying to much coal to China to help China overproduce aluminium with coal electriciity... so to keep aluminium prices down to the benefits of GE, Boeing, Coca, Coal shareholders enjoying some dividends.. Blah! Phony market fixing... China, shut down your stinking old smelters now!! Start importing aluminium from modern smelters around the world!! China, you are polluting the air wtih coal and antiquated aluminium smelter emissions that you ought to control more but refuses to.. YOu are the highest cost producers of alujminium... You losers!!, China!!

  • Report this Comment On November 08, 2011, at 1:07 PM, bimurtud wrote:

    What is the historic average p/e 5 of the dow? P/e 10? Is the DIA a buy right now?

  • Report this Comment On November 08, 2011, at 2:34 PM, Stoneaa wrote:

    Why are you focussed on stocks from the DOW? Here is an interesting sheet of America’s cheapest Large Caps that have the highest expected growth for fiscal 2012. Stocks from the sheet have a market capitalization of more than USD 10 billion and an expected earnings per share growth of at least 20 percent for the next year but have a price to earnings ratio of less than 20 and a price to sales ratios of less than 2.The list is sorted by dividend yield.

    http://bit.ly/njqmr8

    The average P/E ratio amounts to 13.04 while the forward price to earnings ratio amounts to 9.24. Price to sales ratio is 1.05. The expected earnings growth for next year amounts to 36.60 and 16.79 percent for the upcoming five years.

  • Report this Comment On November 11, 2011, at 1:21 PM, HyperionCR wrote:

    My take on your comment on the financials:

    JP Morgan, maybe

    Bank of America, no

    Simply put, BAC's management is awful by comparison and they have had the greatest number of negative surprises around. Citigroup is similar. Wells Fargo and JP Morgan are much better picks if you're going for bank shares.

  • Report this Comment On November 11, 2011, at 2:27 PM, downwfinancials wrote:

    Your P/E numbers P/En does not take into account the $80 Billion in Goodwill they still have on the books, much of which still will need to be written down Also the past 5 years include almost 3 years of totally different economic environment than what banks now have to compete in.

  • Report this Comment On November 11, 2011, at 2:29 PM, emphasis5270 wrote:

    With the current financial dilemma and of the recent past, it is a crapshoot to dabble in financial stocks with any seriousness or intensity - unless you have a lot of discretionary cash. The Dodd-Frank labyrinth being the fourth worst thing to hit America, following WWII, 9/11, and ObamaCare, how can any financial expert be certain of anything.

    My advice is stay away from them and go with certain growth stocks such as MCD and DD

  • Report this Comment On November 11, 2011, at 3:26 PM, SteveTheInvestor wrote:

    Considering the state of the US and indeed, the world's financial markets, I view a P/E of 10 or 12 as being the new 15. The standard of living in the US will steadily decline for the foreseeable future. Europe is a disaster, etc. Not much there that makes feel like a p/e below 15 is a great bargain.

  • Report this Comment On November 11, 2011, at 8:13 PM, 800reviews wrote:

    Well looking at the top 3 not cheap for me on a risk adjusted basis.

    1) HP's business model is up in the air. The fact that they are scrambling to make rash decisions within their divisions just tells me shrinking margins to come.

    2) As for Travelers and JP Morgan , i just dont like whatever is hiding on their balance sheet. I.E. upside down swaps and high default sovereign debt.

  • Report this Comment On November 14, 2011, at 11:16 PM, rel77 wrote:

    I own shares of MSFT, CSCO and JPM. Since I just started learning about investing about 4 months ago I'm glad to see that my conclusions are supported by other analysts. What made me interested in investing was when I saw that many stocks on the DIA are trading at the same price they were in the 90's. Chances to buy solid companies at these prices don't come along often.

    I also bought PFE and, as an outlier, NOK. I've read many reviews of their new MSFT run smartphones and people are raving about them. I also think their decision to focus on the emerging market demo is a smart move.

  • Report this Comment On November 17, 2011, at 5:48 PM, orangefloyd wrote:

    I looked at a few banks, BAC and JPM in particular, a couple years ago when we were just settling in to the whole financial mess. Now on the other side of, oh, let's say 2010 for an arbitrary middle, I'm not confident in the financial sector wholesale. If I had a better understanding of financials and investing at the large institutional scale than I do, it might be different. But I feel like I have to effectively outsource the research and understanding of the business to someone else for those types of companies, and I'm just not willing to buy into the financial sector under those circumstances in these times.

    Technology, on the other hand, is my wheelhouse. With that in mind, I'm bearish on HPQ, bullish on MSFT, and need to take another look at CSCO. HPQ occupies the same space for me that YHOO does: a business looking for its way forward, and struggling in that process. It's a little bit better off in that it's suffered more from ambiguity than outright setbacks in the past few years, but I have no confidence in Whitman to set things on the right path, as eBay hasn't really fared substantially better during the past several years. I honestly have hope that she'll be able to turn things around, since I (emotionally) like HP being a strong player in the business, but I'm not going to put my money behind it, not right now.

    MSFT on the other hand has the illusion of looking like the aforementioned companies, but really has done a pretty good job of identifying and following its path. Its problem is that none of its new markets have paid off on a scale that would make a substantive impact. But it's maintained its influence and impact in the face of that, and it does a good job of continually identifying and exploiting new markets without major setbacks. I'd say it's got 10 years to find another hit before real troubles surface, and I think the chances of that are near 100%. In light of that, it may take a while to pay back, or it could happen in ... let's say 9 months as a lower bound. I'll be putting some money in here soon, I'm just not rushing to do it tomorrow.

    CSCO has had plenty to complain about as a business from the client side. That said, they are the big daddy in the big business of e-communications hardware. They're always worth a look, and I need to check them out again to see if I still have the same reservations I used to have, competition-wise.

    Other than that, there's plenty of other businesses on the list that are interesting for various reasons, but I couldn't really put together an intelligent critique.

  • Report this Comment On November 19, 2011, at 11:24 AM, krystoff wrote:

    I like the basic idea of looking at 'blue chip' or a.k.a. 'index' stocks based on long-term p/e ratios. Also I suspect that right now just happens to be a good time for 5-year analyses. This is because this includes the unusually catastrophic year of 2008, plus the unusually good years of 2009 and 2010, balanced with the wavery years of 2007 & 2011.

    I would however like to point out that using 5-year averages is not automatically sane. Such as if for example you do that two years from now, starting with a rebound year such as 2009. And this is what a lot of people seem to be doing, when they pick ETFs whose history only starts in 2009. Also as others have implied, perhaps we should look at the p/e over 5 "normal" years before starting in with foolish conclusions.

    More importantly however, an essential value for me is "rebound potential." When you buy a stock or a basketball, make sure it bounces. I would take the Dow as a whole and ask myself, "Why on earth would I want to rent anything in this tenement district?" The Dow-30 and the S&P-500 both have not yet recovered from the crash of 2008. What is 'undervalued' here may remain 'undervalued' forever, relatively speaking. Surely you can find undervalued stocks dwelling in a more resilient neighborhood, such as the NASDAQ.

    (And for those who are truly Foolish, perhaps even consider alien stocks from other planets, such as the Emerging Market Index, which is very bouncy.)

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